Can firms really save the planet? Investors pull out of ESG funds

Business ethics are never far from the headlines, whether it’s about ‘greed’, the behavior of male bosses at the CBI or Labour’s plan to bar companies from new oil and gas drilling in the North Sea.

The UK has a long tradition of companies trying to combine profit with social goals, dating back to the Quaker entrepreneurs at Cadbury and their co-religionists at Unilever.

The Victorian chocolate barons believed in enlightened capitalism, treated their workers well, and provided products, such as chocolate or soap, that people enjoyed.

The modern embodiment of this spirit is ESG – investing based on environmental, social and governance principles.

It’s become a multi-trillion pound industry in its own right – and one that’s evolved from purely for the sandal-wearing lentil munchers into the mainstream.

Its most prominent advocate is none other than Larry Fink, a Wall Street titan and the boss of BlackRock, the largest fund manager in the world. However, not everyone is happy.

A selling point for the ESG funds is the idea that they will be more profitable in the long run than those that remain exposed to environmental and social risks.

But investors are not always willing to make a short-term financial sacrifice for the sake of their principles.

ESG funds have just had their worst withdrawal month ever, with people withdrawing more than £300m in May amid concerns about market turmoil and rising inflation.

Instead, they accumulated in seemingly safer money market funds.

Many funds have underperformed as they refrained from investing in oil and gas, missing out on rising energy prices following Covid and the war in Ukraine.

However, the controversy goes far beyond investment performance.

In the US, ESG has, rather unlikely, become a focal point in the culture wars.

Florida Governor and presidential candidate Ron DeSantis has made “awakening capitalism” one of his main goals.

He signed a bill last month banning state officials from investing in ESG funds, saying it is an attempt to impose the politics of “Davos elites” through the back door, through the financial markets.

He has gone to war with, of all companies, Disney after it attacked its new legislation to ban elementary schools from teaching young children about gender identity.

And Joe Biden’s administration this week asked a federal judge to drop a lawsuit from a coalition of 25 Republican states alleging that ESG investing is jeopardizing the retirement savings of millions of Americans.

ESG also has vociferous critics from its own ranks.

One of the most famous is Tariq Fancy, who was head of sustainable investing at BlackRock until disillusionment set in.

He now believes that ESG investing is a ‘societal placebo’ that, at its worst, is actively harmful because it encourages the idea that climate change can be solved in this way.

“We will have to call in the referees,” he says. ESG is not the answer. We need government regulation.’

Where is the poor old private investor?

Performance issues aside, it is not always clear which companies qualify as ESG investments.

For example, oil giants are not necessarily a no-no.

Euan Munro, the CEO of Newton Investment Management, said: ‘I believe it is very important and responsible for investors to engage with major oil companies and encourage them to improve their practices and encourage them to invest in renewable energy sources. .’

What we learn from Russia’s invasion of Ukraine and the disruption of energy supplies, he says, is ‘we can’t just stop oil. We can’t just stop the gas.’

Giulia Chierchia, one of the most experienced women at BP, says the company “provides the energy the world needs today, primarily fossil fuels, while investing in the lower carbon energy system the world will need for the future.

‘You could say: why not just focus on green companies and let them drive the energy transition? But if we do that alone, we fall short of what we need to achieve.’

In other words, without Big Oil we will not get there.

It’s a pragmatic view, but where do you draw the line?

Jacek Olczak, the CEO of Marlboro cigarette maker Philip Morris International, recently stated that his company could qualify as an ESG stock in the future due to its investment in less harmful alternatives. Is he right and who decides?

Financial expert Merryn Somerset Webb describes ESG as “an exercise in every complication. It’s full of inconsistencies, full of opinions and subjectivity and things we can’t really count.”

She says we ask too much of companies and expect them to stray too far from their basic mission of making money and paying dividends.

They are now on the hook for “increasing diversity, ensuring the correctness of links in their supply chains, eliminating the gender pay gap, tackling child poverty… This is one of the big problems of this movement, the ESG movement.

‘What does it mean? Who determines what it means? Who determines the regulations? Who makes the boxes we need to tick?

“Probably most ordinary investors want their companies to behave reasonably, run a good business, treat their employees reasonably well, make sure nothing out of the ordinary happens in their supply chains, and make money.”

• Analysis BBC Radio 4: what are companies for? hosted by Ruth Sunderland will air at 8.30pm on Monday 12th June.