Why I’m Not Onboard With ESG Investing…yet

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green wind fields

I’m not quite yet onboard the ESG train.

It’s become an increasingly more prominent focus for investors over the last 5 years.

The climate and general health of the earth has never been a bigger issue, effecting millions around the world already with droughts, rising sea levels, and environmental destruction and degradation on a monumental scale.

Investment funds are responding, offering funds and bonds that collate some of the world’s leading companies and government programmes for people to pump their money into in order to fund green and ethically focused businesses and projects.

The net flow moving into these funds has increased ten-fold. From 2018 to 2020 alone net flow increased from $5billion to over $50billion*.

COP26 brought these ideas evermore to fore, albeit with an all too familiar air of scepticism and political posturing we’ve come to expect from the empty words of our dear earthly leaders.

Opinions aside, putting your money towards a good cause has never been easier, and all while receiving a nice return on your commitment.

So what is ESG?

ESG stands for Environment, Social and Governance.

Companies or funds that fall within this category are generally thought to be making a positive impact on the environment (think Tesla moving the world away from fossil fuel powered cars), have a greater focus on social issues (those that put percentages of their profits back into local charities and the community), or make a concerted effort to comply with government law and regulation (let’s not aid and fund the cartels again hey HSBC).

I say generally, because there is no set standard as to what constitutes as a qualifying ESG investment.

And that’s my first issue with ESG investing…

A lack of standardisation

This is what bugs me the most about ESG investing in its current form.

To make a system of grading have any weight, or give legitimacy to any study, there has to be a standard way of measuring the different variables; otherwise the study is unreliable and you have nothing to determine the cause and effect.

At the moment (and it’s important to note that it is ‘at the moment’, as this may/ will hopefully change), this is not the case with whether a stock or fund is ESG compliant.

The International Valuation Standards Council (IVSC) recently conducted a study including over 150 financial professionals, and found that as many as 14 different ESG reporting frameworks were being used.

Some of the most popular ESG frameworks included the Global Reporting Initiative (GRI) – used by 33% of respondents – the Sustainable Accounting Standards Board (SASB) at 32% and Task Force for Climate related Financial Disclosures (TCFD) at 25%.*

And this is just amongst a mere 150 people within the industry; think how many frameworks and ways of determining compliance are being used across the whole industry.

When you don’t have standardisation, it often comes down to just a matter of opinion. By all means I welcome opinion and a variation of ideas in many areas of life, but with ESG investing mere opinion just doesn’t cut it for me.

One man’s trash is another man’s treasure and all that jazz.

A very basic example, Tesla may be moving people away from fossil fuel powered vehicles, but those batteries are huge and don’t last forever. Where will they go once they’re not longer in use? Landfills? Doesn’t sounds very environmentally conscious to me.

In order for me to get onboard with ESG, the industry needs to establish a standard framework, agreed by all, as to what would qualify under the ESG title.

It’s imperative that this is realised to have any real and meaningful impact.

Greater impact in other ways

The greatest impact you can have on changing a company’s behaviour is to simply not buy or use its products or services.

Simply investing in ambiguously focused ESG funds will not meaningfully change anything.

Consumers and small time investors can have a far greater impact on the fossil fuel industry by buying electric cars, or making tobacco industry think twice by not smoking.

When they see their revenue and profits drop due to changing consumer sentiment and behaviour, that matters. Simply investing in an arbitrary funds on the secondary market that may or may not include companies you agree with as being worthy of ESG qualification, has very little tangible impact.

It’s important we make a strong distinction between ‘us’ as owners of financial assets, and our choices as a consumer.

As a consumer, we know exactly who is in charge when choosing which businesses to support: we are.

With our government’s choices, we at least have a say when it comes to elections and lobbying when trying to enact change at a political level.

But in the case of ESG investing, our choices are limited to essentially the opinion of the fund manager as to what social good or cause to support. And as the world’s biggest asset manager, Blackrock have an undeniably influential position in deciding industry sentiment on these issues.

Greenwashing

This a big issue in business at the moment, and not just within the investment industry.

I’ve seen adverts from BP about how they’re focusing on being more environmentally aware (Come the fuck on!).

This is a form of corporate posturing that the investment industry is far from innocent of.

At the time of writing this, these greenwashing claims by companies are largely unregulated, where businesses could essentially say what they want and get away with it.

The very fact an oil company can claim to be focusing on greener ventures is a prime example of this.

The lax enforcement of a company’s green claims is exactly why ESG investing needs more standardisation. At the moment all I personally see is greenwashing.

Where an investment broker will offer a fund containing all the unethical companies under the sun, but simultaneously offer ESG funds on the next page is quite frankly laughable.

If they really care and believe in it, they’d commit to it.

The opportunistic buyer

Selling an oil share doesn’t have the impact you think it does.

In the world of investing, when buying the investment fund that does or does not contain the oil company, there’s always the opposite side of that transaction.

There is always somebody else willing to buy the stock at the price you’re willing to sell it at – that’s just how the markets work.

Selling a share does not have the same impact as deciding whether or not to consume a certain product based on ethical or environmental grounds.

My worry is that people will think ‘they’ve done their bit’ simply by buying into these funds. Your real world actions will have a far greater reach.

Who really benefits?

ESG funds generally command higher prices for often being nothing more than an ‘index hugger’.

Lawyers and fund managers involved in this industry are making a lot of money on what constitutes as a social good.

If you’re paying a premium for an ESG fund, I implore you to do your due diligence and make sure the fund is doing exactly what you intend it to be doing. Make sure you’re constantly questioning the decisions of the fund manager as to why they’ve included this company as ethically compliant and worthy of being in that fund.

But despite this…

At least the growth of ESG investing is starting to bring these conversations into the mainstream.

Whether there’s a standard or not at this point, investors and institutions appear to be more and more concerned with where their money is invested, and what their banks are doing with their hard earned savings.

We should never, ever forget the likes of Barclays and their role in the apartheid, or HSBC and their role in funding Mexican cartels.

Likewise, the contribution of many existing investment banks and and insurers and their role in the housing market crash of 2008. It’s easy to forget Goldman Sachs involvement when they bring out their shiny new Marcus accounts isn’t it?

So this post isn’t to say don’t invest, or continue to invest in ESG funds, far from it.

It’s a relatively new area of the investment industry and I’m sure there will be further growing pains along the journey.

At the very least it’s putting ethics front and centre of the investment conversation.

So what could we do instead?

For the time being, in my opinion, if you want to do something good with your money, you’re better off putting savings into one of the many ethically focused banks that are much closer to home and have a very real tangible impact on local communities.

My hope is that a realised standard of ESG investing is establish and priority is put on continued transparency. I also don’t want pressure just placed on the businesses, but also on the fund managers themselves around not just where they are investing, but why they’re including this company in the ESG fund.

Sources:

*nasdaq.com

**the-drawdown.com

2 thoughts on “Why I’m Not Onboard With ESG Investing…yet

  1. I have to admit I’m a bit similar as regards to ESG investments.

    Granted I have direct investments in infrastructure companies and companies like Bluefield Solar, but I’m shying away from the funds which mark themselves as ESG because exactly as you mention, there’s no set standard for qualifying as an ESG investment – so much greenwashing. May as well invest in a global index fund, it’ll be pretty much the same companies.

    It’s all down to perception – so Tesla’s ok, if you ignore how those big batteries are going to be disposed of, or how those precious metals are mined in the first place to make said batteries.

    People immediately think of tobacco or oil or gambling as non-ESG, but I’m glad you mention the banks, who have been less than ethical and who nearly broke the world economy in 2008 and some continue to be found to be aiding and abetting money laundering.

    A lot of young folk, inspired by Greta Thunberg are asking for changes to be made to save the planet, yet some of the same young folk might be among those riding the highs of cryptocurrencies and the creation of NFTs – renewable energy isn’t enough to sustain the massive energy required to mine cryptocurrency and create crypto-art, hence it’s still powered by good old dirty coal! You might find this link interesting: https://www.renewableenergyhub.co.uk/blog/how-much-energy-do-nfts-take-up/

    Still, what’s good about the ESG label is that it might cause some companies to change their ways and improve practices because they want to be included on that coveted green list.

    Liked by 1 person

    1. Yeah I think barring the ethical baking options I linked to, if you really wanted to invest that money in ‘green’ opportunities you’re best doing it in individual companies like you’ve done, or that TRIG company (if it fits your idea of ESG).

      God those NFT things are just incredible. It’s a sure sign of a bubble when that sort of thing is getting bought. Buy whatever you like, but it’s on par with investing in toys or video games.
      [From your link]…”One transaction uses as much power as the conventional household over a day and a half.” That’s eye-opening, I wonder how that compares to a card Visa transition in a shop – not even sure how you’d measure that though.

      Yeah I think the biggest thing is the conversation around it, but I’m far too cynical and think most ESG fund managers are just seeing this as a money train and not really concerned with the reason for ESG investments.

      Liked by 1 person

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