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Putting all eggs in an investment basket won’t solve the climate crisis

Vast sums of money flow into ESG strategies but firms act on behalf of clients, not the planet


Pete Carvill

We write a lot about ESG on these hallowed pages, so much so that we no longer spell out what that initialism means (it’s ‘environmental, social, and governance’ if you had forgotten). The problem with the term ‘ESG’ is that it is a label that, in many ways, now means nothing at all. It is a symbol, beamed out of corporate brochures and prospectuses, a way for large funds and corporations and companies to say, “Hey, look at us. We’re on your side. We’re the good guys.”

On 24 August, US financial commentator Robert Armstrong jumped straight to the point in the Financial Times with an article called ‘The ESG Investing Industry is Dangerous’.

There, Armstrong writes: “We’ve got big global problems. I am a capitalist red in tooth and claw, but I just can’t see how financial markets have a meaningful part to play in solving these problems until citizens and governments act first and decisively.”

Don’t hold back, Bob, please; now is not the time.

Drop in the bucket

Armstrong’s piece quotes widely from Tariq Fancy’s ‘The Diary of a Sustainable Investor’, which is available both on Medium and as a PDF on Dropbox. Fancy is the former chief investment officer for sustainable investing at Blackrock who has now turned against much of what he used to work in. His article is an excellent read; the TLDR version of it is that there is not a bridge in his former company that Fancy has not decided to burn to the ground. With a flamethrower. And then stamp on its ashes and insult its mother for good measure.

Perhaps Fancy’s screed is best illustrated through his anecdote about meeting Bill McGlashan of the RISE fund in San Francisco in 2016, when Fancy was on the cusp of moving into sustainable investment. The RISE fund, writes Fancy, was a $2bn endeavour that was ‘[…] managed by the TPG Group, a San Francisco-based private equity firm with close to $100bn under management’.

Reflecting later, Fancy says: “Leaving aside whether or not the fundraise would be successful and create real impact or not, I wondered to myself: a $2bn fund may be enough to bump Carole Baskin for a keynote spot at the next flashy social innovation event, but is it enough to make a difference if the majority of the global economy, with nearly $6trn in private equity alone and some $360trn of global wealth overall (3,000x and 180,000x times larger, respectively), continue operating business as usual? The RISE fund seemed like an ambitious effort that could help, but was ultimately a drop in the bucket against a tidal wave that was going in the opposite direction.”

The world economy, goes Fancy’s argument, is so big and complex that the virtue-signalling intents of financial companies is not enough. Real, systemic change from the top down, led by governments and fuelled by citizens, is the only thing that is going to save us.

Holier than thou

There is perhaps a fallacy—or even a fraud in ESG investing—that the motivations of a fund are to do some good. Even Google was halfway in on such a mirage, having an unofficial motto of ‘Don’t be evil’ that it quietly retired three years ago.

But a financial firm’s top priority has to be its fiduciary responsibility to those putting their money into it. That is not a philosophical argument, but a legal one.

There is an obvious conflict between the proclaimed good intentions of ESG investing and getting the best returns. So much so that, according to the Irish Examiner, that cheap oil stocks are ‘[…] still attracting huge investor interest in ESG world’.

The piece is itself a little confused and does not demonstrate that oil stocks are being bought up at any increased pace. Despite the pledges from the oil companies to increase payouts and buy back shares, ‘[…] the sector is again the worst performer in the broad market’.

So, according to the Irish Examiner, investors ‘can’t get enough’ of oil stocks, but the latter’s performance is still terrible in a broader context. The Examiner does quote one source, however—Niall Gallagher, investment director of European equities at GAM Investments—who says of oil stocks: “It just strikes us that looking right now in the market at what is very cheap, generating lots of cash, but also having very strong earnings momentum, the energy stocks really stick out as being very attractive.”

That is not much evidence of a rally. But the story is on firmer ground when it says of oil stocks: “They’re cheap, pay big dividends and have benefited from a recovery in oil prices. That’s an attractive combination for investors who are nervous that the broader market is overvalued after the relentless rally from the pandemic bottom last year.”

Growth trumps good

I am not a fan of the phrases ‘good news’ and ‘bad news’. News is just news. So it was interesting when the European Investment Bank put out its European Firms and Climate Chance 2020/2021 report this month. The report was put together to look at how investing in climate measures and transitioning to a net-zero carbon economy could be done through the covid-19 recovery plan.

The report found: “Around 45% of EU firms report investments to address climate change, compared to 32% of US firms. Western and Northern Europe saw the largest share of firms investing in these measures, standing at 50%. This is followed by Southern Europe with 38% and Central and Eastern Europe with 32%.”

There is a growing, continuing narrative that investment in climate change prevention and reversal is an ongoing, forever-increasing thing. I have written into that myself at times. But we should not put to one side the fact that firms have that fiduciary responsibility, and that capitalism will, as it always does, aim for continual growth.

We should not forget that. Because the big firms and investment companies definitely will not.