ESG, typically known as Environmental, Social, Governance is a hallmark of any company these years. Perpetuated by the inevitable warming of the globe and the growing unrest of social issues across many developed nations, the focus on ESG is stronger than ever. Companies, especially public ones, have undoubtedly placed an increased emphasis on this valued indicator of social good/environmental friendliness/etc.
ESG Investing is one of the branches that was birthed from the increased scrutiny of investors and managed funds on their portfolio companies. Specifically targeting companies that aim to do good, and do well (financially). It incentives both the companies with promises of perhaps greater capital allocation and favourable business conditions from governments, while providing investors with seemingly great benefits of investing in the future and the social good of the world.
Today, the ESG investing landscape is awash with billions of dollars worth of funds. Yet, more is demanded and required as quoted. To promote further efforts and enact greater ESG benefits to really help the world. However, in this inaugural article, I explore 3 different instances where it might seem that ESG investing is not as glorious and well-meaning as it claims to be.
'The ESG Mirage' was an article written by remarkable journalists over at Bloomberg - documenting how an institutional finance company can mislead investors about a company's ESG ratings. MSCI, the company in question, is best known for its index business - crafting and combining companies into a portfolio of stocks for investors to buy into. Given its exposure and business model - it also provides ratings too. Through the millions of datapoints it gathers and uses when creating said indexes. Of course, it provides ratings for a company's ESG practices. To cut to the chase, their ESG rating methodology does not even consider a company's impact on the environment/social factors - it instead measures how likely environmental issues would harm a company's bottom line. A total flip on what is supposedly meant for a company that does good for the E in ESG well. The authors also found that only one of the 155 upgrades in environmental scores were due to an actual cut in emissions. Companies with massive emissions like McDonalds (up to a 7% increase in emissions in four years) still managed to get an upgrade due to environmental factors. These are just some cursory points raised by the article, but it does poignantly puts into question, who will hold these rating companies accountable for their practices, and how trustworthy or reliable are their rating methodologies.
Divestments or engagement. Another key arguing point among investors - to divest and disincentivise ESG poor companies? Or to continue investing while engaging them to improve their ESG standards. This is a whole other debate for another time.
However, it leads me to discuss the idea that divestment by publically owned funds on ESG poor companies/assets only leads to funds being raised or having their assets owned by private companies (without heavy ESG obligations/commitments). The Environmental Defense Fund (EDF) study exposes this idea https://www.edf.org/media/report-oil-majors-take-climate-goals-data-shows-billions-worth-their-polluting-assets-are. The authors tracked M&A deals from 2017 to 2021, and found that almost 300 deals worth close to $140 billion have transferred assets from companies with ESG commitments to those without. 150 deals worth close to $90 billion moved assets away from companies which had net-zero goals. All this does, is showcase the shadier, gray area of these corporate commitments and obligations, and the way some companies might manoeuvre their assets and subsidiaries to fulfil these commitments. In this case, there seems to always be a willing buyer, and someone to adopt these less ESG friendly assets.
Finally, we have an example of a leading asset manager adjusting itself on its espoused ESG values. BlackRock is by far, the world's largest fund manager. And to its merit, it has close to 150 sustainability-focused exchange-traded funds. It also aims to increase its sustainable assets to $1tn within a decade. Clearly, BlackRock has an iron fist towards ESG related issues in its business model. That said, reports by the Financial Times mentioned that it may not support as many shareholder climate-related resolutions this year due to too extreme or too prescriptive measures proposed. The group also commented that it might not be 'consistent with our clients' long term financial interests'. That said, to give BlackRock credit where it is due, its emphasis on ESG and sustainability is something that many more firms can emulate. Prescriptive or over-the-top claims are about just as effective as the world pushing towards a net-zero standard so far. Talk is easy. More actionable directives are needed. Here's to hoping that BlackRock will continue its push toward the ESG field and continue supporting this treasured planet with financial institutions and investors.
These are just 3 very recent instances of ESG-related grey areas within the financial industry. That said, there are definitely good initiatives and efforts from institutions that truly seek a net-zero and ESG friendly world. There are more issues to be discussed, and an ocean of information out there.
Here are just some topics off the top of my head -
The existence of over 400 ESG related frameworks - is at worst confusing, at best misleading. Though, we have institutions like ISSB and EUFRA helping out.
The economics of corporate responsibility - stakeholder responsibility.
Economic reporting - the old reporting standards were based largely on scarcity in the past/ the purpose of a business. But today, should we think about how the scarcity of the now and future can influence corporate reporting
Till next time,
Johann
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