No Such Thing… A few words about ESG Investing

By Brian V. Iversen, Founder and Managing Partner of Cimbria Capital

Most of the following words were crafted several months ago. Until now I hadn’t decided to share since I was uncertain about their relevance. Today’s delivery is triggered by a Wall Street Journal (WSJ) article written last week by Jed Rubenfeld and William P. Bar and named “ESG Can’t Square with Fiduciary Duty.”

In my view, there is no such thing as ESG Investing. It’s a flawed and, at best, a widely misunderstood concept. But let’s start from the beginning… ?

I am strong believer in the roots and the underlying values of ‘Environment, Social, and Governance (“ESG”)’. Cimbria Capital – a boutique growth equity investor focused on the water economy – was founded upon values very similar to those fundamental to the ESG Concept. Meaning, we fully agree with these ideas and values. We firmly believe that measures are needed to combat climate change, we believe in protecting our nature from long-term damage, we believe in equality and fairness between all people, and we believe that corporate governance benefits from diverse and transparent decision-making bodies. Although we are not always entirely successful, we strive to exemplify these values since we believe it is appropriate, valuable, necessary, and our responsibility to do so.

That said, ESG as an investment category doesn’t work. In my [blunt] view, ‘ESG’ as an investment mandate is non-descriptive - and borderline meaningless. There’s a shallowness to this type of investment provision akin to inventing trivial investment mandates such as ‘I like People Investing’ or ‘Positive Financial Returns Investing’ or ‘Be Good to the Animals Investing’; all agreeable concepts but meaningless and without much logical sense as a descriptive and defined investment area or mandate. And using ESG in this way both baffles and worries me.

I’ll be direct - the morphing of the ESG Concept into ‘ESG Investing’ is dilutive and damaging to the underlying values of ESG. It allows for the ESG Concept to take the shape of a commercial and ‘for profit’ value driver triggering ‘green-washing’ (or as ‘ESG-washing,’ as we have come to call it). It is also creating a false sense of accomplishment in those pursuing commercial endeavors from this perspective. Therefore, I am worried that the ongoing hype related to ESG investment mandates has become counter-productive to the underlying value drivers and real needs of our society. I also believe it will lead to loss of capital since rational investment sense is entirely or partially side-lined. This will, in turn, create a bump in the road towards the paradigm shift to a cleaner and fairer world dearly required. ?Frankly, I think certain ‘ESG Investors’ are making a mockery of ESG as a value-set. I will be happy to explain further…

ESG has inside the past few years moved from being a mostly unknown idea and concept to a widely used and largely understood set of values. It is now a hyped idea-platform, and it has become a buzzword used throughout a vast amount of commercial scriptures (advertising, branding, pitch-books, investment committee memorandums, etc.). - And that is supposed to be a good thing, since awareness has been created where awareness was dearly needed. But – unfortunately - the concept has been so successfully promoted that we risk skipping a step. The step where the awareness turns into better and more sustainable habits. It is not enough for any of us to ‘slap the ESG label’ on our investment memorandum if we are still making the exact same investment as we would have without it or if our management of that specific investment doesn’t change. It is also not good enough for us – as investors - to invest money into new businesses, business models, or value propositions for the sole reason that it relates to renewable energy, the water industry, regenerative agriculture, because it is produced without the use of plastic, or because it is female-led. For the record, I can easily make the argument that female business managers and leaders from many perspectives have greater capacities than their male-counterparts. But I will only deploy my investors capital into companies and executives based on merit (period!). ???

Only fundamentally valuable and profitable investments will lead to additional and ongoing investment. And only ongoing and continual investing can create lasting and positive change. It is that simple, in my humble view.

Mr. Larry Fink, Chairman and CEO at BlackRock – I do read his shareholder letters and watch his firm’s endless promotion of ESG – has been one of the most vocal proponents of ESG Investing. At first – a few short years ago - when Mr. Fink ‘saw the light’ and promoted ESG and acted as if they had come up with it, I applauded this [push] since their credibility as the world’s largest asset manager brought the ESG value-set to the masses in a new and powerful way. After a little more reflection for my most objective inner voice, the only conclusion I can get to reads as follows: Mr. Fink’s aggressive inclusion of ESG into BlackRock’s investment mandate - their new recipe - consists of equal parts of ‘appropriate for our time’, ‘landgrab’, and ‘snake oil’. Meaning, there is more to it than BlackRock being a newfound conscientious asset manager. Enough said.

So, if ESG is not an investment mandate, what is it? To me, ESG is about shattering paradigms. It is about healthy values that drive new and positive change. It is about all of us looking ourselves in the mirror long enough to understand that some of our social and professional habits stem from flawed paradigms that need revisiting. It is about broadening our perspective and allowing for a re-write of certain laminated procedures and rulesets. It’s about improving ourselves personally and improving our corporate and societal cultures. Let ESG be what it is meant to be, a foundational value-set and an educational driver of more informed and balanced views and habits.

What does that mean to us as investors? I propose for ESG to be layered into our due diligence process in the same fashion as we do legal and financial due diligence. As an investor, ESG is a diligence tool of utmost importance since neglecting to understand your investment targets’ ‘ESG health’ will likely leave you exposed in a changing world. ‘ESG neglect’ will likely also trigger neglect of your fiduciary responsibilities. ESG is a diligence tool. Never leave home without it.

What does this mean to us as individuals? I propose for each of us to use ESG as educational guidance to the corporate cultures we touch. Please consider keeping ESG values in the forefront of your mind and actions to ensure continual improvement throughout your professional ecosystems; in your interactions with your colleagues, employees. business partners, investors, etc.

ESG has since inception been part of the fabric of the investment firm I took part in creating, and I will continue to use these values for both personal and professional guidance. Meaning, I am all for ESG. It’s some of the people selling it, I worry about.