ESG’s wake-up call

A controversial speech may be the catalyst for change that the sustainable investment industry has long needed

Photo by Markus Spiske

The performance of stock markets this year might lead you to think that the green agenda has been very much put on a backburner. Along with tech, green investments have suffered a savage sell off, while the value of dirty old extractive industries have soared and brought about a rare period of outperformance for the oil and mining heavy FTSE 100. Here are two charts that tells that story:

Shell up, Orsted down…

Source: SharePad

Meanwhile ‘controversial’ comments from key figures in the green investing industry suggest the trouble is more than just an opportunistic rotation as energy prices soar in response to the Ukraine crisis, and that there may in fact be something fundamentally wrong with the financial service industry’s relationship with ethical investing.

I am, of course, referring to widely reported comments made by HSBC Asset Management’s global head of responsible investing Stuart Kirk at a recent event. In a speech at the FT’s Moral Money conference provocatively entitled “why investors need not worry about climate risk” he suggested that the current “end-of the world” narrative was doing more harm than good and had become utterly detached from the reality of investment. Asset prices have paradoxically marched ever higher even as the warnings of “climate catastrophe” have grown louder – “unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings are ALWAYS wrong” he noted. If the experts and technocrats are right than all investors have, he pointed out, got their thinking very wrong.

The main reason it’s more likely to be the experts that are wrong, he argued, is that “human beings have been fantastic at adapting to change, adapting to climate emergencies, and will continue to do so”, which is why deaths from natural disasters have fallen by 99% in the last 100 years (and why stock markets just keep on rising). And to keep that going we should, Mr Kirk argued, now be investing in continued adaptation rather than focusing on mitigating climate change, as so much environmental investing aims, King Canute-like, to do. In other words, we’d be better off learning to live with the effects of climate change than trying to stop it.

Queue muted applause from the presumably flabbergasted FT audience. Indeed, lots of people, especially ESG industry people, are very angry with Mr Kirk, and it’s possible that his “heresy”, as he himself described it, may cost him his job. That would be very typical of the current fad for witch-burning, and a real shame, because it’s been quite clear for some time that ESG is a very flawed methodology – or more accurately, collection of often conflicting methodologies – and a bit of heresy is just what’s need to get past the almost cultish groupthink that seems to have evolved around it.

The suspicion anyway is that the ESG groupthink is as man-made as the environmental damage it’s trying to mitigate – an invention of the investment management industry seeking a new way to justify its existence in the face of huge passive-led fee pressures. That was essentially the point made last year by another industry heavyweight, former global head of sustainable investing at BlackRock who having quit the firm penned a 40-page tirade against the ESG industry. In fact, he argued, it’s worse than that – ESG, he summarised “is a dangerous placebo that harms the public interest”, delaying real solutions to pressing problems in favour of nice words and intricate-but-useless benchmarking systems, and pots of greenwash.

Not that, judging the condemnation of Mr Kirk, ears seem to be open – because, as Tariq Fancy warned in his essay, “the system will react the way we’ve learned it always does, trying to protect profits at all costs, including by convincing us that we don’t need to change the rules.” If a heretic of two must be burned at the metaphorical stake to keep the ESG gravy train rolling, so be it.

But according to Paul Clements-Hunt, the former UN official who coined the term ESG in 2004, the sustainability dyke may have been breached, and the industry may be forced to change whether it wants to or not. Speaking to City AM he said: “Marketing sustainability, green and ESG, however an asset manager wished to package it, was an easy win for asset gathering over a couple of years or more. Increasingly managers will be held to account as policymakers, prudential oversight institutions and regulators seek to end a Klondike gold rush for easy assets.”

And if, as I suggest you do, you actually listen to Mr Kirk’s presentation with a curious and open mind, you’ll see that it is very far from a diatribe against sustainable investing – “I don’t doubt the science at all,” he said – but a plea for a change of course that may do the world some good, and within a financially-literate framework that does investors some good, too.

Because sustainable investing is no different, if you think about it, from any other kind of investing – businesses, like humanity, have always needed to adapt to survive, and stock picking remains about picking the ones most likely to do so. Environmental and social concerns are simply another factor in that never-ending corporate obstacle course – something which well-governed companies that look after the world in which they operate have always understood.

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