ESG investing is the idea that capitalism can right itself

ESG investing is a good thing, right? Surely it is a positive development if the world’s big investors and pension funds move their money away from polluting stocks like oil, gas and coal and into funds that support our planet and its people?

Or is it all a bit too little, too late?

ESG investing is an investment approach that considers Environmental, Social, and Governance factors alongside traditional financial criteria when making investment decisions.

The goal of ESG investing is to seek positive returns while also making a positive impact on the world by promoting sustainability, ethical practices, and responsible corporate behaviour.

Human communities and economies worldwide are being battered by a seemingly endless stream of climate-related disasters. Many now wonder: is it too late to save the planet and the majority of species that live on it?

To save the planet, it is estimated that global warming should be limited to well below two, preferably to 1.5 degrees Celsius, in line with the Paris Agreement.

Many companies, regions, cities and countries now have carbon neutrality targets and carbon-free solutions are very competitive across economic sectors.

Due to this trend, there has also been a marked increase in business opportunities in both the power and transport sectors, and investors are putting their money into so-called environmental, social and governance (ESG) funds.

However, is this all too little, too late?

Is ESG just a placebo, a nice distraction for investors to feel good while polluting corporations continue with their ‘profit over planet’ activities?

The horrifying truth is that the burning of fossil fuels, unsustainable land use, overfishing, and deforestation are some of the many corporate activities that have disrupted Earth’s atmosphere, oceans, and land surface over the past 50 years.

These activities pose dangerous health and safety risks to humans and the other species who live on earth.

The emergence of environmental, social and governance (ESG) was lauded as it offered at least a ray of hope.

ESG is the idea that capitalism can right itself.

Instead of investing in ‘dirty’ sectors like the fossil fuel industry, investors are pumping more money into greener, more environmentally friendly initiatives.

Could ESG investing ‘persuade’ the big polluting corporations to change their ways and embrace greener forms of doing business?

With so much money being pumped into global ESG funds, it appears that investors may help turn the tide.

Global ESG fund assets reached about $2.5 trillion at the end of 2022, up from $2.24 trillion at the end of the third quarter, according to Morningstar.

The trend shows no signs of slowing down.

It’s a start. However, cracks are appearing in the idyllic world of ESG investing, and they expose an underlying problem.

In the target-driven world of fund management, sustainable investing is not what it seems.

Tariq Fancy, the former sustainable investing chief of one of the world’s most considerable investment funds, Blackrock, came out publicly to suggest ESG is a ‘dangerous placebo’.

He says that there were some fallacies associated with ESG.

“Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion.

In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise,” wrote Fancy.

Yes, a bit like subprime mortgages associated with the fall of the global economy in 2008, green bonds and some ESG funds could be just fronts for companies to secure investment in their less pristine activities.

“Most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans. And nothing stops them from pursuing decidedly non-green activities with their other sources of funding,” says Fancy.

It is possible, yes. But such firms and their boards are playing a dangerous game.

‘Green washing’, as it’s called, is where corporations claim green credentials to divert attention away from their less environmentally safe activities.

In his expose, Fancy writes that to change the world honestly, ESG funds would have to be much larger than they are right now. He says they are simply not going to get big enough.

“Is a $2bn fund enough to make a difference if the majority of the global economy, with nearly $6tn in private equity alone and some $360tn of global wealth overall (3,000 times and 180,000 times larger, respectively), continue operating business as usual?”

If you sit on a company’s board, you need to ask some very tough questions and dig into the data.

If your organisation is exposed as a ‘greenwasher’, or an investor in greenwashing funds, this carries many risks, including financial and reputational.

And remember, with all this talk of ESG and greenwashing, we can expect to see a rise in ESG rating agencies. These agencies will start producing regular exposes of corporations who are less than green with their ESG claims.

There’s an excellent paper published by Harvard Law School entitled: Running the Risks: How Corporate Boards Can Oversee Environmental, Social And Governance Issues.

ESG investing is still in its infancy, but it does show a substantial global appetite for more sustainable investments. The optimist will say this is only the beginning and point to ESG as the best way out of this mess. The pessimist will say ESG can’t compete with ‘traditional’ investing and that corporations are designed to drive profits for shareholders.

In the end, it will be up to shareholders and the boards that represent them. But as the planet warms and wildfires devastate nations and sea levels rise, we can expect much stricter regulations and even sanctions against giant, polluting corporations.

ESG is here to stay. We must remain hopeful that it isn’t too late to help save the planet.