ESG: hyperbole or history in the making?
Henning Stein, PhD, GCB.D
Results-Oriented Investment Solutions Executive | Certified Board Member | Asset & Wealth Management Change Agent | International Presenter & Author
From margins to mainstream... to rut?
When does the reassuringly familiar become the worryingly clichéd? Look at the pronouncements of many financial services providers, businesses, governments and other entities and you may notice that they all say pretty much the same things in proclaiming the merits of ESG.
The dominant narrative revolves around sustainability, safeguarding the future and serving the greater good. It emphasises dynamics such as existential threats, consumer awareness and regulatory pressure. It highlights fiduciary and moral duty, long-term objectives and the importance of allocating funds in ways that make a positive, lasting difference.
Of course, this monotony could be interpreted as a welcome development. It might indicate that ESG’s move from the margins is now so advanced that it has brought blissful unity. It might supply evidence that all concerned are “singing from the same hymn sheet” and that the journey towards a brave new world is well under way.
Increasingly, though, I have my doubts. It could just as easily mean that ESG, having at last entered the mainstream, is now carving out a giant rut. It could mean that everyone has mastered the art of talking the talk while not particularly caring about walking the walk. Above all, it could mean that the most significant investment trend of our age is at the mercy of hype and complacency.
This is far more than a question of “greenwashing”. It is a question of how the biggest challenges facing our planet and its inhabitants are framed and tackled. Ultimately, it is a question of direction and determination – of where we are really heading, where we really want to go and how we really intend to get there.
I have experienced ESG’s evolution at first hand for more than 20 years. I even remember when what is today fashionably termed “stakeholder capitalism” was almost exclusively known as socially responsible investing (SRI). I was involved in the launch of one of the first SRI programmes for a retail audience, the creation of pioneering initiatives in emerging markets and the building of one of Europe’s top ESG management teams.
So I have witnessed a lot of change in this space, the vast majority of it for the better. But now something needs to change again – and soon.
Is ESG as we know it truly sustainable?
One person certainly not singing from the same hymn sheet in discussing ESG is Tariq Fancy, former CIO for Sustainable Investing at BlackRock. Speaking in a number of high-profile interviews, he has warned that ESG – especially with regard to the climate crisis – may have become little more than an epic distraction.
Fancy joined BlackRock in 2017. He was tasked with realising CEO Larry Finks’ vision of using the power of free markets to stave off environmental catastrophe. He left after concluding that the concept of stakeholder capitalism is simply “hollow marketing”, that the case for it is “tortuous” and that ESG as a whole constitutes “a giant societal placebo where we think we’re making progress even though we’re not”.
Why does Fancy hold these opinions? He argues that short-termism retains huge appeal, not least at a time when CEO tenures are briefer and better-paid than ever, and that most businesses are therefore still “run-for-profit machines”. He notes that irresponsibility, although we might wish to think otherwise, frequently makes money. He likens divestment to “playing whack-a-mole”.
There is obviously more than a grain of truth in all these contentions. Of all Fancy’s criticisms, though, the one I most wholeheartedly agree with is that the investment community cannot deal with the world’s woes on its own.
This is where the prevailing ESG narrative is taking its most unhelpful and unrealistic turn. Investment has an enormous role in addressing global warming and other major issues, as every declaration about ESG is swift to make clear; yet to infer that it represents the one and only answer is deluded and damaging.
As I have remarked in previous articles, systemic issues require systemic solutions. While COVID-19 has shown what is possible when the public and private sectors share a sense of urgency and work together, the supposedly collective approach to many ESG considerations is still fragmented and unfocused.
This applies in arenas ranging from pollution to animal welfare, from food security to social inequality. The essentials of co-operation and coherence are routinely lacking. Rhetoric is too often the sole common denominator.
Two traps to avoid
The first trap to avoid in proclaiming the merits of ESG, then, is the tendency to imply that investors alone can further its cause. It is wrong to suggest – whether deliberately or not – that the investment community is unique in its ability to safeguard the future, serve the greater good, counter existential threats and so on.
Granted, many of these goals cannot be achieved without investors. Equally, though, investors cannot achieve them without the significant participation of others – policymakers foremost among them.
As I observed in an earlier piece, many of the ESG commitments championed by those in policy circles have been inadequately defined in their demands and unduly modest in their aims. Few could be described as genuinely radical from an innovation perspective. By and large, they can be classified as incremental and expedient.
Investment should not be thought of as a perpetual remedy for these shortcomings. Such an interpretation is at the heart of the placebo effect that Fancy warns against, and it merely prolongs the status quo of distant targets and halfway-house proposals. The more this mindset is encouraged – again, whether deliberately or not – the less likely meaningful progress becomes.
This brings us to the second trap to avoid in proclaiming the merits of ESG: giving the impression that the job is virtually done. It has barely begun. There is a tremendous amount of work still to do – and a seemingly enduring disinclination to actually do it.
So what could be accomplished if investors, policymakers and other stakeholders were to coordinate their endeavours? What might result if ESG objectives were to be pursued as keenly as, say, those linked to the pandemic?
This is the extraordinary prospect that these traps obscure. The years ahead may not only present the most spectacular business opportunity in history: they may also offer an unprecedented chance to improve nearly every aspect of our lives.
An opportunity too precious to waste
The notion that ESG is central to bringing about positive, lasting transformation was among the tropes I listed in introducing this piece. Like its similarly well-worn counterparts, it happens to be fundamentally true: the problem is that insufficient is being done to prove it.
Germany’s Federal Constitutional Court has recently underlined as much by ruling that the country’s climate-protection measures should be strengthened to cut emissions more quickly. So have studies showing $90 trillion needs to be spent on green infrastructure worldwide by 2030, with $4 in benefits likely to be recouped from every $1 invested; that green energy and bold climate action make economic sense; and that adaptation, as opposed to mitigation, still accounts for only a tiny fraction of climate finance.
With the necessary collaboration and momentum, ESG really could change everything. Green technologycould propel us beyond carbon neutrality. Energy could be reinvented. Food production and consumption could be revolutionised. Commerce, manufacturing and cities could be reshaped, with ESG complementing the spread of AI and 5G. Inequity and other social ills could be eroded.
Maybe all this also smacks of what Fancy calls “hollow marketing” – but it is hollow only for as long as the narrative stays unfulfilled. Like Fancy, I am not saying that ESG is ultimately a fruitless exercise: I am saying that we need to take it to another level if it is to transition from hyperbole to history-maker.
This can happen only if we resolve to move on from the current crop of clichés. We have to back radical innovation. Policymakers must join a combined effort, provide direction and demonstrate determination. We may celebrate that some progress is being made – for instance, in the ESG elements of the US’s $2 trillion mega-infrastructure package and the European Commission’s €1.8 trillion post-COVID-19 recovery plan – but we must also accept that we are a very long way from where we need to be.
In addition, we have to stop viewing ESG purely through the lens of risk mitigation. As I said before, this is also about opportunities – a means both of enhancing performance over the course of decades and of fashioning a greener, safer, fairer world.
I mentioned at the outset ESG’s “reassuring familiarity”. Maybe we should remember that familiarity breeds contempt. I have been a firm believer in ESG for almost a quarter-century, and I will remain so; but it is time for a more ambitious, more concerted trajectory – one capable of lifting us out of a rut and steering us towards the kind of future we should all want.
Disclaimer: The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment-making decision. As with all investments, there are associated inherent risks.
Links
Guardian: “Green investing ‘is definitely not going to work’, says ex-BlackRock executive”
Climate & Capital Media: “Tariq Fancy: ‘ESG’ and ‘sustainability investing’ are deadly distractions in the climate crisis”
LinkedIn: “What next for globalisation?
LinkedIn: “Food for thought: why we must save animals to save ourselves”
LinkedIn: “Climate change and the limits of long-termism”
Guardian: “‘Historic’ German ruling says climate goals not tough enough”
United Nations Climate Action: “Financing climate action”
https://www.un.org/en/climatechange/raising-ambition/climate-finance
LinkedIn: “Tech, investment and a better world”
LinkedIn: “Crisis is temporary – opportunity is permanent”
joebiden.com: “The Biden plan to build a modern, sustainable infrastructure and an equitable clean energy future”
https://joebiden.com/clean-energy/
European Commission: “Recovery plan for Europe”
https://ec.europa.eu/info/strategy/recovery-plan-europe_en
United Nations Climate Change: “Climate commitments not on track to meet Paris Agreement” as NDC synthesis report is published
CEO @ Guardian Rock Wealth - Wealth Management Expert | Financial Expert Speaker, Podcast Host & #1 Amazon Best Selling Author | Dad of 6
3 年Great article! I remember well over a decade ago when I was the portfolio manager for the #PowerShares Clean Energy Fund it was tough to say it would likely be a good performer as many of the #innovations were not yet proven profitable. Today we are seeing truly profitable #ESG innovation benifiting investors. As always the pendulum usually swings too far and shortermism runs rampant. There is rarely one answer, it is not just investors that will make the difference and we will always have greenwashing, but I am still encouraged with the progress we have and are making towards a better planet for our children and grandchildren.
Several great points raised here. I also liked the reminder that it’s not just a risk mitigator but a performance enhancer as well. ????Ready to move the conversation forward.
Chief Global Market Strategist at Invesco
3 年Thank you Henning. Some great perspectives on ESG.
Strategic Advisor ? Executive Coach ? Pitch Trainer ? Advisory Board Member
3 年Thank you Dr. Henning Stein - great read as always! Whilst raising awareness (with so called ESG criteria) is crucial, we also need to act in parallel at individual as well as corporate levels. The end investors need to understand that "simply" investing in so called ESG strategies will not suffice and there needs to be a shift in behaviours (e.g. #responsibleconsumption). Likewise, the companies providing ESG strategies as those investing in them should have more holistic approaches and would gain in trust by implementing measures at company level such as setting up carbon accounting and reducing emissions in a sustainable manner...