Investment mirage
Anthony Rowley says the trillions invested in environmental, social and governance initiatives has diverted funds away from more worthy projects
Many people seem turned off by the subject of climate change and yet, as investors, they have collectively poured huge sums into fighting the phenomenon. I wonder if they would be happy to learn that much of this money may be going to waste.
Environmental, social and governance (ESG) investing became a solution for global warming and associated climate change until a reaction set in against it. Now, that reaction is turning into a retreat.
The Financial Times reported that a net
US$40 billion has been withdrawn from ESG equity funds so far in 2024, according to research from Barclays, marking the first year in which such flows have turned negative.
ESG is not so much an investment bubble as a mirage, one so powerful that, by the end of 2022, global ESG assets had exceeded US$30 trillion and were projected to reach more than US$40 trillion by 2030, according to a Bloomberg Intelligence report at the beginning of this year. Withdrawals to date may not look so large against that, but the tide of opinion has turned against ESG.
While other countries such as China have approached the problem of global warming with practical solutions like mass producing relatively cheap solar panels for export to the rest of the world and others have sought institutional solutions, major Western economies have seemed to place a high priority on ESG – a purely financial construct.
It was flawed right from the start. ESG is too diffuse, allowing for myriad interpretations of what the term means and enabling firms to claim compliance with vaguely defined standards. ESG was a well-meaning concept when thenUnited Nations secretary general Kofi Annan promoted it 20 years ago when he wrote a personal letter to the CEOs of 55 of the world’s leading financial institutions asking them to behave like good corporate citizens.
All they had to do was promise to respect the environment, keep in mind their (undefined) social obligations and practise good corporate governance. That would earn them the approval, it was suggested, not only of the UN but of corporate shareholders and perhaps even stock markets. This, in turn, would generally burnish the image of capitalism while aiding environmental sustainability.
Such rosy views were to prove shortsighted. For one thing, they overlooked the need for much more direct and urgent approaches to global warming – the need to replace coal- and oil-fired power generation with renewables or nuclear energy, and to finance the vast transition costs involved.
Getting the corporate sector to promise good behaviour across a range of goals that include sustainability and the environment among others is not the same as directing investment into welldefined climate goals like reducing greenhouse gas emissions. The energies of the financial sector would have been better directed towards the latter.
Instead, investment in ESG stocks and funds has allowed it to dominate the sustainability universe at the expense of other approaches. Until now, that is.
Even before the recent withdrawal from equity funds, ESG had become so associated with “woke” capitalism that the CEO of investment leviathan Black Rock, Larry Fink, refused to use the term, saying it had become too “politicised”. Criticism of ESG has reached a crescendo among those who claim it is an affront to the kind of free-market capitalism espoused by the likes of Milton Friedman, and that it puts companies at a disadvantage compared with others, a notion that resonates strongly as geoeconomic tensions rise.
But a more telling indictment is that ESG is too complicated to monitor effectively. Some suggest that greenwashing is effectively licensed by this complexity.
The tsunami of money that has flowed into ESG funds from institutional and individual investors, and which has chiefly benefited the fund management industry, might have been better directed to other forms of sustainable investment.
The key question now is whether disillusionment with ESG will sabotage already lukewarm interest in climate investing, leaving governments with a growing need to foot the bill, estimated at anything from US$100 trillion to US$200 trillion.
The bottom line is that market-based solutions are just not going to work without official intervention to decide where the need for spending is, how much is required and in what form investments should be structured. Fortunately, multilateral development banks have agreed to coordinate their efforts on climate change.
But this does not go far enough. They need to be given more capital and authority to identify projects and fund them in the initial stages before packaging and securitising them for sale to the market.
That way, maybe we can avoid ill-conceived efforts like ESG that threaten to waste trillions of dollars more than they have done already. One way or another, this is going to hit the pockets of investors and/or taxpayers and that should make them sit up and take notice.