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More than half a decade before its latest rebranding, I gave a speech in Berlin about environmental, social and governance investing. Unlike my infamous “Miami under water” presentation last year — which stated the bleeding obvious, I thought — this one was deliberately provocative.
It forewarned that ESG (as a desired output of investing, not an input) had an existential problem due to three inconsistencies at its core. At the time I argued they were reconcilable. Recent events suggest not.
Take Monday’s announcement by the UK government confirming hundreds of new North Sea oil and gas licences. Whether for reasons of energy security or political expedience, the move now directly contradicts the fossil fuel policies of many banks.
European lenders in particular have gone blue in the face trying to reconcile being green with making money. The most popular ruse was promising not to finance “new” oil and gasfields (refusing only “new” clients was another trick).
Now these banks will miss a bonanza. They are also at odds with a democratically mandated decision. Harrumph all you like about US politics this week, but at least America’s approach to energy aligns with the banks that serve its citizens.
My point is not for the funding of new oil and gasfields — although to my mind the International Energy Agency’s projections are clear that a worldwide path to renewables still requires spending on new fields given that existing ones decline at 8 per cent per annum.
No, what I said in my speech is that moral high grounds invariably crumble — mostly due to changes in scientific knowledge, attitudes, money or politics. Even Joe Biden demanded that big oil companies in America get pumping when rising fuel prices risked three congressional elections last year.
In one slide I mocked-up a newspaper with the headline “Investment Industry Treason”. The article beneath was about local fund managers who refused to invest in arms manufacturers on ESG grounds despite a build-up of enemy forces on the border. Then “tanks rolled into the east of the country . . . ”
War of course is an extreme example of how norms shift. Cluster bombs, which are back in the news, were banned in every equity portfolio I have ever managed. But today Ukraine drops them in the name of freedom. Divestment is suddenly appeasement.
Unless investors can see the future, therefore, this problem is intractable. Likewise, ESG’s second fatal inconsistency: knowing where to stop. If a miner of coal is unsustainable then so is the truck company hauling the stuff. And why not its tyre supplier or the rubber maker? Throw in their accountants too.
This is no hypothetical. Next year, for example, European firms with more than 500 employees will be forced to collect environment, social and governance data on every single company up and down their supply chains.
Yes, seriously. But wait. In 2025, these rules apply if you have a minimum of 250 staff. Then small and medium-sized companies start getting dragged into the legislation the year after. “Ciao Luca! It’s your uncle in Milano. What were your factory’s emissions last quarter — grosso modo?”
Death by fatuous and incomparable data. And somebody has to arbitrarily decide the relative weightings between “E” or “S” and “G”. This is the final inconsistency I raised in my speech: that everyone has their own view on what is good and bad.
Why are huge efforts made to exclude tobacco stocks from portfolios but not food companies who overload our meals with sugar, salt and saturated fats? Beats me. Nearly half a billion people suffer from type 2 diabetes around the world. It is in America’s top 10 causes of death.
Or how come we hold companies to account over diversity and not work-related mental illness, which makes up half of all days lost to sick leave? Some investors care about governance, others homelessness outside their office.
The result is that no one has a clue whether to punish the likes of ExxonMobil or reward it for committing to spend a billion dollars a year on green energy research. If both, in what proportion? Meta is uber green but stinks on “S” and “G”, according to a report just published by Internews.
No wonder both companies are found in sustainable funds. It’s a free for all. So much so that only 41 per cent of Europe’s most sustainable “Article 9” products even bother to target a minimum 90 per cent exposure to sustainable assets, according to Morningstar data.
Expect class action lawsuits. Asset managers have already rushed to downgrade 40 per cent of their Article 9 funds to be on the safe side. It’s probably too late, guys.
Uncertainty has always been the mortal enemy of investing. And few ideas are more inconsistent, and thus uncertain, than ESG — no matter how you brand it.