The ESG investing debate caught between woke capitalism and greenwashing accusations

Can reason prevail?

Do rational arguments have a place in the debate about ESG investing?

By what extraordinary process can ESG investing be accused, all at once, of promoting woke capitalism and greenwashing?

The expression ‘woke capitalism’ is a US born provocative rebranding of the more austere ‘ESG investing’ by a number of high-flying American politicians and would-be politicians. Its purpose is to bring a technical debate into the political arena. Its message is that ESG investing tries to divert capitalism from its objective of creating wealth by sneaking political objectives into the world of investment. According to the self-branded anti-woke capitalism crusaders, ESG investing would run against the fiduciary duty of asset managers to maximize returns for investors and, as a way of consequence, for the corporate world to maximize profits for shareholders. If it were to be the case, this would be no small affair as it would come down to changing the economic system we live in, something many argue as indispensable to the survival of the planet but something not trivial as we know. The key question is therefore: does ESG investing really do that? ?

Let us look at the reality. The bulk of ESG investing today is about assessing the sustainability-related risks that can impact companies’ financials and the business opportunities arising from solutions developed to address the world’s sustainability challenges.?This is what ESG specialists call ‘financial materiality’. Investing is the function of allocating capital with a view of maximizing returns on a risk-adjusted basis, and this is what ESG investing in its (dominant) financial materiality dimension does. This is perfectly in line with mainstream financial theory and with the canon law of capitalism. Under a capitalist logic, maximizing return without adjusting return for the risk taken does not make economic sense and leads to a dead-end. Conceptually, the largely prevailing financial materiality dimension of ESG investing can be seen as a continuity of traditional financial management.

Concretely, ESG investing tries to assess the consequences on companies’ accounts of, for instance, coastal floods, wildfires, droughts, diminishing water resources, pollution or the disappearance of bees leading potentially to a disappearance of pollination, to name but a few of the environmental risks humanity is facing. A similar list could be drawn up for social risks. At a time when scientists tell us that up to a quarter of the US, home to 100 million Americans, will be exposed to temperatures of over 50° C by the end of the century, as will many other parts of the world, such an assessment is an obvious integral part of the fiduciary duty of asset managers.

The irony of the current debate is that the anti-woke capitalism narrative criticizes ESG investing for being disruptive of the usual (and, in their view, only effective) way of doing business whilst, at the other end of the spectrum, numerous voices accuse ESG investing of being intrinsically a greenwashing exercise as it brings nothing new to traditional investment management in its endeavor to capture the financial consequences of sustainability-related risks and opportunities. ESG investing is seen as detrimental to business as usual by one camp and guilty of being only business as usual by the opposite camp…

If we look rationally, ESG investing’s most serious problem stems from the fact that it is ill-defined. The lack of clarity of the objectives it pursues, along with the aggregation of fundamentally different environmental (E), social (S) and governance (G) factors, is a recipe to feed confusion, difficult debates and sterile wars of words. Is ESG investing about managing the financial consequences of sustainability-related risks? Is it about seizing sustainability-related business opportunities? Or is it about developing a positive impact on the sustainability of the world? If we want to appease the debates and stop the contradictory accusations of woke capitalism and greenwashing from flying around, clarifying the objectives of ESG investing is a most urgent task.

However, the fact that ESG investing is still work in progress and needs to be refined considerably is not a reason to throw the baby with the bath water. ESG investing is not by essence greenwashing even if many greenwashing situations exist and greenwashing is a permanent temptation, nor is it a financial version of a so-called woke conception of the world.?Let us take ESG investing for what it can achieve and avoid making it responsible for all the planet’s woes, as both the anti-woke camp and the camp of those accusing it of not being able to be anything but greenwashing do. ESG investing, however useful, will never be by itself the silver bullet to the world’s sustainability woes and there is so much finance can do in the absence of adequate public policies. ?This does not mean that it is not a step in the right direction.

…and, to conclude, four simple questions to Governor Ron DeSantis, Senator Mitch McConnell, Vivek Ramaswamy and the cohort of their anti-woke capitalism allies:

Do you agree with the statement that there can be no such thing as a profitable non-sustainable business?

If you agree with this statement, do you agree that assessing the risks to sustainability, and therefore to profitability, makes sense from a business standpoint??

Or do you think that the world’s sustainability is not at risk?

Or is it all about politics?

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Thierry Philipponnat

Chief Economist, Finance Watch