Baroness Helena Morrissey has been an executive at multiple asset managers and is a noted City diversity campaigner
ESG has had a torrid time of late. After becoming startlingly fashionable, the whole movement has entered rockier territory.
Some of the criticism is blatantly provocative — see Elon Musk, (“it’s a scam“), PayPal founder Peter Thiel, (“it’s a hate factory“), and HSBC’s responsible investing head Stuart Kirk, (“central banks have spent way too much time on climate risk“).
It’s easy to dismiss these as rants. Actually, I think all three make some valid points. But even fervent ESG believers are wrestling with doubts and dilemmas.
The Russia-Ukraine conflict catalysed much of the angst. Surely defence companies, typically excluded from ESG funds and indices, have a positive purpose if they help a country defend itself from unprovoked aggression?
The energy crisis poses another quandary: has investors’ preoccupation with E for environment diverted investment too quickly from ‘old energy’ supplies? And what should ESG investors do about their positions in those countries that have not condemned Russia’s actions?
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Alongside this new wave of concerns, a longer-standing worry over ‘greenwashing’ has translated into a growing number of fines issued to companies that have made ‘misstatements and omissions’ concerning ESG.
The EU has tried to create a much-desired ‘green taxonomy’ by classifying funds as Article 6 (not ESG), Article 8 (ESG) and Article 9 (Impact), but a misalignment between different regulations has left fund managers taking very varied approaches to disclosure. At this point, 19 out of the 20 biggest Article 8 funds don’t even mention ESG or sustainability in their names.
It might seem surprising that these issues have suddenly emerged. But they are the culmination of a long period of collective muddling through two irreconcilable issues: the desire for clarity and simplicity versus the messy complexity of our world. No company is pure good or bad — and there’s much subjectivity around those standards anyway.
Tesla is a great example. The company may have done more than any other to make the polluting combustion engine a thing of the past. At the same time, it has suffered controversies over employee relations and a racial discrimination suit, as well as issues over corporate governance. Tesla is far from alone in having mixed scores when we separate out the E from the S and the G.
And yet, we can all agree that there are those who do aspire to high ESG standards and others who really don’t care and are happy to, say, make ‘fast fashion’ at a cheap price with high hidden costs to the planet and their labourers. ESG does mean something. But it cannot mean everything.
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And today’s arguments have been heightened — as always — by extremists. At one end of the spectrum are those for whom ESG is the only way to analyse value, who deride those who disagree and who make the most of the vague definitions (especially around the S) to push certain agendas. The sceptics stand at the other end of the spectrum, also adopting hyperbolic language, while feeling justified in their efforts to reinstate the traditional, proven drivers of shareholder value.
The way forward is for ESG to evolve to reflect reality and to spell that out. Simplicity is desirable but not within anyone’s gift. Instead of trying to create an implausibly neat taxonomy, we should explain that ESG indices are not objective — they are highly subjective and will reflect the values of those creating them — and that ESG company scores are relative, not absolute, and are at best an indication of intent.
Companies will be good at some aspects, bad at others. Sometimes, things will occur — the sudden cost-of-living crisis, for example — that throw previous assumptions up in the air and demand a different approach to, say, energy supplies.
A truly responsible approach isn’t dogmatic; it is about optimising the best outcome. This might include helping to finance any transition we need to make to have cleaner, more dependable energy and adaptations to lessen the cost and the pain. All of this should be clearly conveyed, not obscured by simplistic labels.
For its own survival and reputation, ESG needs to move from being a divisive doctrine to an approach that is about balancing interests, making reasonable judgements, adapting to reflect new developments and investing on a best-efforts basis. Honesty is the best policy.
