Why ESG Investing Is No Longer the Buy-side’s Top-Performing Cliché

By May 7, 2019 February 9th, 2021 No Comments
Why ESG Investing Is No Longer the Buy-side’s Top-Performing Cliché

It doesn’t take a genius to figure just how dire things are in this world we call home. These flashpoints offer a sense:


Climate Change – The Killer Thaw

“Climate change is likely to cut Antarctica’s 600,000-strong emperor penguin population by at least a fifth by 2100, a study suggests.”

BBC, 30 June 2014

Less than five years later…

“Thousands of emperor penguin chicks drowned when the sea-ice on which they were being raised was destroyed in severe weather.”

BBC, 25 April 2019


Child Labour – Still Rife in the 21st Century

“Car and tech companies are scrambling for supplies of cobalt, a mineral they need to power electric vehicles and smartphones… A CNN investigation has found that child labour is still being used to mine the valuable mineral at some operations in the Democratic Republic of Congo.”

CNN, 3 May 2018


Corruption – There’s an Economic Cost

“The annual costs of international corruption amount to a staggering US$3.6 trillion in the form of bribes and stolen money, United Nations Secretary-General António Guterres said…”

World Economic Forum, 13 December 2018

In truth, the aforementioned examples represent only the tip of the ESG (Environmental, Social, and Governance) issues requiring urgent resolution.

But the unfortunate reality is such: Governments, with their finite resources, face hard choices in prioritising how they allocate budgets. And, as a result, end up leaving problematic gaps unaddressed.

Evidently, there exists a yawning gap between the resources needed to effect change and what’s (actually) available.

All is not lost.

Private Capital to the Rescue

While a shortage of funds and, to some extent, the lack of political will, has been pinpointed as common obstacles, they also create an enormous investment opportunity for private capital to be deployed to great effect.

Nine in 10 respondents of BNP Paribas’s ESG global investor survey are predicting that “impact” allocations will form more than a quarter of their funds by 2021.

And it’s already happening.

Take Norway’s US$1 trillion sovereign wealth fund, the world’s largest, for example. In March 2019, it made a firm choice to cut oil and gas exposure from its portfolio.

“Although the proposal has not stated that it is driven by climate risk, it mentioned the lack of renewable energy prospects as a rationale for shortlisting the stocks it plans to divest. This may trigger other investor groups to follow suit, impacting sector valuations further,” Investory’s Devi Subhakesan wrote in a research Insight published on Smartkarma.

Read Devi Subhakesan’s full research Insight on Smartkarma: Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note

Promising signs, no? Hold that thought.

Beneath the Greenwashing

On the surface, ESG investing appears to be catching on. But beneath that facade, structural challenges remain.

BNP Paribas’s study has revealed that the greatest impediment to ESG integration isn’t a lack of conviction of its potential to improve long-term portfolio performance, nor the risk of greenwashing, nor inadequate backing from senior leadership.

It’s access to data!

Barriers to ESG adoptionSource: BNP Paribas

“I believe data on sustainability is now viewed in a similar way to how financial data was treated around 75 years ago,” notes Andreas Feiner, founding Partner at sustainable asset manager Arabesque.

“This has resulted in a situation where some companies avoid disclosing some information that would potentially show them in a negative light.”

Heap and Keep the Pressure On

Feiner couldn’t be more right.

Earlier this year, Exxon Mobil wrote to the US Securities and Exchange Commission, attempting to solicit the regulator’s help in blocking an investor proposal that called for the firm to set emissions targets.

Exxon clearly felt the heat from investors!

From this case, we can see how the power to alter corporate practices (for the better) stems not from ESG investing itself, but through its resulting activism.

Investors often look to bigger investors for direction and validation. And who better to lead (and influence) this proactive push for change than the world’s largest institutional investor – BlackRock:

“Profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked…

Companies that fulfil their purpose and responsibilities to stakeholders reap rewards over the long-term. Companies that ignore them stumble and fail. This dynamic is becoming increasingly apparent as the public holds companies to more exacting standards. And it will continue to accelerate as millennials – who today represent 35 percent of the workforce – express new expectations of the companies they work for, buy from, and invest in.”

Larry Fink’s 2019 Letter to CEOs

The time has come for custodians of private capital to reexamine their patchwork approach to investing sustainably.

Their investees, on the other hand, also face a pivotal decision: Genuinely embrace the tenets of ESG, or be prepared to be isolated by the broader investment community.

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