Do ESG investments really deliver?

I got up this morning and followed my usual routine of walking bleary-eyed to the kitchen, hitting up the ageing espresso machine and getting the day started. The next step is to check out what the news says, a five minute exercise that typically teaches me nothing interesting or new. Ten minutes after rising from dreamland, I'm in front of the computer, beginning my day.

Speak to any young person, and the 80's goal of driving a red sports car is a million miles away from what matters to them.

This morning though, something hit me and made me wonder 'why'. It was a Twitter article sent to me by a friend; it seems that the 'ex' CIO of Blackrock Sustainable Investing group, Tariq Fancy thinks that ESG doesn't really make any money, making little difference to the world. He compares the world to a cancer patient and that ESG was not an effective way to treat this illness. Apparently, the approach of making the private sector responsible for its actions is 'misleading' the public; it's down to governments to tell people how to behave.

Now, this is where I have to scratch my head and think, the idea that companies are not responsible for their behaviour and that it's the government's responsibility to force legislation is confusing. This is coming from a 'free market' guy who's primary role is to make money. He argues that ESG doesn't make a difference, and I was wondering what the alternative is?

Well, it's short-term gain, simple as that. He misses completely, though, that while on one side of the market, the investor's primary role is to fund companies where they will get a strong return, the other side of the market, the consumer base, is fed up with this approach. Speak to any young person, and the 80's goal of driving a red sports car is a million miles away from what matters to them. They are, after all, the ones that will 'inherit the earth', not some self-indulgent rich old guy. And what kind of Earth are we leaving them (full disclosure, I'm an old 80's guy myself)?

There is no longer a credible dispute that the environment is changing faster than it has ever done before. The weather is a mess, deserts are encroaching rapidly on once-fertile ground, and according to the WWF, we are seeing 1000x increase in natural extinction rates. Those who find the time to be outraged by scientific fact and massive consensus are no longer seen as sane individuals. What they hope to gain from their ranting and anti-climate change screams is beyond me, but perhaps they are being funded by investors such as Mr Fancy.

This is where his nonsensical statement on Twitter starts to make sense. Let's be honest; the investment community is not historically known for its righteous behaviour and upstanding social contributions. They are, however, known for being a group of extremely rich individuals with little concern for the small guy. Their success and fame are built mainly on their investments in media and twisting the narrative that 'everyone can be successful, 'just like me'. Of course, when you consider that in any race, there will be a single winner and many losers, this doesn't hold true at all. Yet humans like to believe that they are different to everyone else and that they too could have enough money to last 2000 generations.

The next generation know that if we do not take our responsibilities seriously, they will have a very different world to live in than the one that generation X inherited from the war-loving baby boomers.

Human nature also leads many of us to the conclusion that rich people must be right. We have created the world based on money as the primary ranking of value, not clean air or abundant oceans. Conversely, the environmentally friendly folk are seen as dope-smoking hippies, and we never see them roaming around their clinically perfect Hollywood cribs. We celebrate those who have won the race and even applaud while they rub their disproportionate success in our faces. But 'times, they are a-changing.

The next generation is waking up to the fact that the privileged few's actions are nothing more than self-indulgent child's play. They know that if we do not take our responsibilities seriously, they will have a very different world to live in than the one that generation X inherited from the war-loving baby boomers. We need to change our ways, and while the promise of government intervention sounds plausible, the reality is that the governments in the western world are funded by the same rich people who mine fossil fuels and invest where they see the easiest returns.

This is why ESG being taken seriously plays an important role. Mr Fancy seems to completely ignore the long term benefits in favour of short-term financial gains. ESG will not magically transform growth-based businesses into socially responsible ones overnight; he's right on that front. However, the fact that the larger investment community (note that he is an 'ex' CIO at Blackrock and Larry Fink, the current CEO and Chairman has a very different message) and that consumers are voting with their own money means that companies that do not have a very serious ESG commitment in place will become the more expensive option.

According to the FT, it already seems that the companies that do take ESG seriously outperform those that don't. This LinkedIn article by our very own Dr. Grimme highlights the point even further, AXA insurance have dropped Germany's RWE (coal production) as a client because they are not moving fast enough to reduce their carbon footprint.