Beware the ESG hype
Right now, many companies and fund managers see a rich seam of PR opportunities in the environmental, social and governance (ESG) space.
It is always nice to think that your investments aren’t just helping you build up a decent pension but also helping to save the planet. And for CEOs it seems to show that conscious capitalism works.
But Tariq Fancy, who ran the ESG team at BlackRock, now admits that the system of rating companies on their
ESG achievements gives a pass to many bad actors, driving large fund flows to them and lowering their cost of capital.
As veteran SA investor Dave Foord puts it, we have seen the oil majors’ brochures of happy, smiling communities, focusing on their token investments in wind farms. But this is simply greenwashing when, as Foord puts it, we all know they are black as sin.
Anne Cabot-Alletzhauser recently left the investment industry to become practice director of the Responsible Finance Initiative at the Gordon Institute of Business Science. At the recent Morningstar conference, she set out many of the challenges that ESG poses to fund managers.
She says that simply disinvesting as a single manager from a bad ESG actor, such as Sasol or Eskom, doesn’t make an impact. To change behaviour, asset owners with at least 20% of the capital would need to sell out. But they can make much more of an impact at listing stage, as they can force more stringent conditions on companies before providing them with their initial capital.
Cabot-Alletzhauser says managing ESG needs a completely different skill set from the conventional fund manager’s job of good investment performance. ESG certainly provides a marketing opportunity for active managers, as so much of their traditional active equity and bond space has been taken over by index funds.
Life companies such as Old Mutual and Sanlam can deploy capital into long-term impact investing products, investing in sectors such as schools and hospitals which don’t provide an immediate return — clients might have to wait at least five years to get any money back.
But ESG investing, including in infrastructure, is not as scalable as traditional asset management. As more projects are started, each needs another specialist manager to shepherd the process.
Ultimately the money doesn’t belong to asset managers but to their clients — me and you. And so we need to be a little sceptical about the ESG hype.
Cabot-Alletzhauser says ESG is not a “factor”. In other words, she argues that it is not like value shares or small caps which have proved to add value to a portfolio in the long term.
ESG scorecards have only had a 13% impact on the shape of ESG equity funds. In fact, they have an 87% correlation with ordinary equity funds. ESG scorecards rarely change and are therefore backward-looking. While stewardship is a nice concept, and asset managers do engage with companies over issues, it is amazing how rarely they have the courage of their convictions, preferring to keep discussions secret from their clients. Issues are occasionally forced at AGMs, but the relationship between fund managers and listed companies remains too clubby and cosy.
Maybe, as the ultimate shareholders, we need to be a lot more proactive with our ability to demand that fund managers exercise the views we express through proxy votes. Let’s have less sizzle and more sausage.
Success in ESG scorecards drives large fund flows to bad actors and lowers their cost of capital