Who killed the ESG party?

Summary

The video script discusses the evolution and current state of ESG (Environmental, Social, Governance) investing. It highlights the shift from hype to disillusionment, with factors like the Ukraine invasion and political backlash affecting ESG's image. Despite challenges, ESG is seen as integral to long-term investment strategies, focusing on climate risk and sustainable practices as essential for financial success. The script suggests ESG will become a standard part of investment processes rather than a separate category.

Takeaways

• 🌍 ESG stands for Environmental, Social, and Governance and is a framework for investing that considers these factors alongside financial ones.
• 📈 The term ESG gained popularity after the 2015 Paris Agreements, aiming to keep global warming below 2°C.
• 🔍 ESG investing aims to support companies that are beneficial to the environment, society, and have good governance practices.
• 📉 The hype around ESG has peaked and declined, with some suggesting it may disappear as a term but continue in practice.
• 💡 ESG investing is seen as a response to climate change and other global challenges, aiming for a more sustainable future.
• 🛑 The invasion of Ukraine by Russia has shifted focus towards energy security, affecting the performance of ESG strategies.
• 🗳️ Political backlash, especially in the US, has contributed to a decline in ESG discussions and support.
• 💼 Some asset managers and financial institutions have become quieter about ESG due to political and public pressure.
• 📊 ESG ratings can vary significantly between different agencies, leading to confusion and calls for regulation.
• 🚫 Criticisms of ESG include concerns about 'greenwashing', where companies misrepresent their sustainability efforts.
• 🌱 Despite the backlash, proponents argue that ESG investing is essential for long-term financial and environmental sustainability.

Q & A

What does ESG stand for and what is its purpose?

ESG stands for Environmental, Social, and Governance. Its purpose is to invest in companies in a way that helps the environment, advances social aims, and encourages proper corporate governance.

Why did the term ESG become trendy after the Paris Agreements in 2015?

The Paris Agreements aimed to keep global warming well below 2°C above pre-industrial levels, prompting a realization that the private sector needed to play a part in combating climate change, hence the rise in ESG's popularity.

What is the role of the Norwegian Sovereign Wealth Fund in ESG investing?

The Norwegian Sovereign Wealth Fund, led by Nicolai Tangen, manages $1.6 trillion and owns about 1.5% of all listed equities worldwide. It considers ESG factors seriously, viewing climate as a financial risk and integrating ESG into its investment strategies.

What was the peak of the ESG excitement, and what event marked this?

The peak of ESG excitement was in 2021 during the COP26 climate conference in Glasgow, where the Glasgow Financial Alliance for Net Zero was announced with support from major financial institutions.

How did Russia's invasion of Ukraine impact the ESG movement?

The invasion led to higher hydrocarbon prices and a focus on energy security, causing a shift away from climate considerations. It also resulted in underperformance of ESG-driven strategies compared to the wider market, which was boosted by oil and gas.

What role did Tucker Carlson play in the backlash against ESG?

Tucker Carlson led a political backlash against ESG, accusing it of causing energy rationing and farmer revolts. His influence contributed to a cultural war narrative that pressured financial institutions to quieten their ESG promotion.

What was the impact of Larry Fink and BlackRock on the ESG movement?

Larry Fink, CEO of BlackRock, was a prominent advocate for ESG, promoting the idea of using capitalism to address its shortcomings. However, political and media attacks led BlackRock to become less vocal about ESG, with Fink even stating a preference for not using the term.

Why did the asset management industry initially embrace ESG?

The asset management industry saw ESG as an opportunity for growth, with strong inflows into ESG funds. However, the industry also faced criticism for potentially misrepresenting ESG investments and greenwashing.

What is the controversy surrounding ESG ratings and how they are measured?

ESG ratings are subjective opinions on how environmental, social, and governance factors will impact a company's financials. There is controversy due to the lack of standardization, with different agencies producing varying ratings for the same company.

What does the future of ESG look like according to the script?

The future of ESG is expected to see sustainability embedded in the investment process, with the term ESG possibly disappearing as it becomes a standard part of doing business. The focus will shift to genuine impact over marketing and labels.

How does the script suggest the ESG movement should evolve to be more effective?

The script suggests that ESG should move beyond hype and focus on real solutions, integrating ESG considerations into standard investment practices, and ensuring that actions align with long-term financial and environmental goals.

Outlines

00:00

🌐 ESG: The Changing Landscape of Investment

The paragraph discusses the evolution and current state of ESG (Environmental, Social, and Governance) investing. It highlights how ESG has shifted from being a mere marketing trend to a significant factor in how people invest their money. The focus is on investing in a manner that benefits the environment, advances social goals, and promotes good corporate governance. The narrative also touches upon the hype cycle of ESG, suggesting that while it may have peaked, it's now moving towards a more mature phase where the focus is on real solutions rather than mere marketing. The importance of ESG is underscored by the Norwegian Sovereign Wealth Fund CEO, who views climate change as a financial risk and emphasizes the need for long-term investment strategies that consider ESG factors.

05:02

📉 The ESG Hype and Its Decline

This section delves into the peak and subsequent decline of the ESG hype cycle. It points out that the excitement around ESG reached its zenith in 2021 during the COP26 climate conference in Glasgow. However, the paragraph suggests that the enthusiasm has waned by 2024, with ESG becoming less of a conversation topic. The narrative identifies several factors contributing to this decline, including the invasion of Ukraine by Russia, which redirected focus towards energy security over climate concerns, and a broader political and cultural backlash against ESG, particularly in the United States. The paragraph also discusses the role of high-profile figures like Tucker Carlson in fueling this backlash and the subsequent quieting of ESG promotion by financial institutions.

10:03

🛑 The Critique and Realignment of ESG

The paragraph examines the criticism and reevaluation of ESG practices within the asset management industry. It mentions the significant inflows into ESG funds and the subsequent decline, particularly in the US, suggesting a shift in market sentiment. The narrative also explores the role of asset managers in promoting ESG and the pressures they face from political and public opinion. The paragraph highlights the concerns about the effectiveness of ESG strategies and the potential misalignment of interests between asset managers and their clients, especially in light of the need for immediate financial returns versus long-term sustainability goals.

15:07

💼 The Internal Conflicts and External Criticisms of ESG

This section focuses on the internal conflicts within companies regarding ESG practices and the external criticisms they face. It discusses how ESG has been used as a marketing tool and the challenges of measuring and proving the effectiveness of ESG investments. The paragraph also highlights the case of DWS and the whistleblowing by Desiree Fixler, which exposed discrepancies between public claims and internal practices regarding ESG. The narrative underscores the need for transparency, accurate measurement, and the integration of ESG considerations into investment strategies without greenwashing.

20:08

🌱 The Future of ESG and Sustainability

The paragraph discusses the future of ESG and sustainability in investment practices. It suggests that the term 'ESG' may fall out of fashion, but the principles of sustainability will become integral to how investments are made. The narrative touches on the need for new performance benchmarks and the role of pension fund trustees in reflecting the world we are moving towards. It also addresses the potential for political instability due to a perceived lack of action on climate change and the importance of serious work to address the challenges and opportunities of the green transition.

25:08

🌿 The Transformational Power of ESG

In this final section, the paragraph emphasizes the transformative potential of ESG and the economic opportunities it presents. It suggests that while the term ESG may no longer be used in the future, its principles will be embedded in all aspects of investing. The narrative highlights the importance of long-term thinking and the integration of ESG considerations into investment strategies for sustainable returns. It also discusses the role of younger generations in driving the demand for sustainable investing and the potential for significant economic shifts as the world moves towards a greener future.

Keywords

💡ESG

ESG stands for Environmental, Social, and Governance criteria, which are a set of standards for a company's behavior used by investors as a non-financial screening tool. In the video, ESG is discussed as a significant factor in investment decisions, with the 'E' referring to a company's efforts to minimize harm to the environment, 'S' to its social aims and impacts, and 'G' to its governance and ethical practices. The video suggests that while ESG has become a buzzword, its practical implementation and effectiveness are under scrutiny.

💡Greenwashing

Greenwashing is the practice of making an unsubstantiated or misleading claim about the environmental benefits of a product, service, or company. The video discusses how ESG has been criticized as a form of greenwashing by some, as companies might use high ESG ratings to appear more environmentally friendly without substantial actions to back it up.

💡Sovereign Wealth Fund

A Sovereign Wealth Fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, properties, or commodities. The script mentions the Norwegian Sovereign Wealth Fund, emphasizing its significant role in global investment and its focus on ESG criteria, which reflects the video's theme of the influence of ESG in global finance.

💡Paris Agreements

The Paris Agreements are a landmark international treaty on climate change, aiming to limit global warming. The video references the Paris Agreements as a catalyst for the increased focus on ESG after 2015, highlighting the connection between global environmental policy and investment strategies.

💡Net Zero

Net Zero refers to the balance between the amount of greenhouse gases produced and the actions taken to reduce or offset them, aiming for no overall contribution to global warming. The video mentions the Glasgow COP26 climate conference's 'Glasgow Financial Alliance for Net Zero,' illustrating the commitment of financial institutions to reduce carbon emissions.

💡Fossil Fuels

Fossil fuels are hydrocarbon-based resources such as coal, oil, and natural gas. The script discusses the underperformance of the fossil fuel sector and its role in climate change, contrasting it with the push for renewable energy, which is a central theme in the video's discussion on sustainable investing.

💡Asset Management

Asset Management involves overseeing, investing, and administering assets for individuals or institutions. The video script talks about asset managers' role in promoting ESG and the subsequent backlash, indicating a shift in how these professionals approach investment strategies.

💡Whistleblower

A Whistleblower is a person who exposes unethical or illegal activities within an organization. Desiree Fixler, a former DWS executive, is mentioned as a whistleblower who exposed discrepancies in ESG practices, which is a pivotal moment in the video's narrative about the credibility of ESG.

💡MSCI

MSCI is a leading provider of critical decision support tools and services for the global investment community, including ESG ratings. The video discusses the role of MSCI in ESG assessments, highlighting the challenges and controversies in measuring and rating companies' ESG performance.

💡Climate Change

Climate Change refers to long-term shifts in temperatures and weather patterns. It is a central theme in the video, with discussions on how ESG investing is meant to address the financial risks associated with climate change and the need for sustainable practices.

💡Fiduciary Duty

Fiduciary Duty is a legal or ethical relationship of confidence or trust between two or more parties. In the context of the video, it refers to the responsibility of asset managers to act in the best financial interests of their clients, which includes considering ESG factors to protect and grow investments.

Highlights

ESG is a multi-trillion dollar marketing scheme that has evolved into the future of humankind.

ESG stands for Environmental, Social, and Governance, focusing on investing in a way that benefits the environment, society, and proper corporate governance.

The term ESG became trendy after the Paris Agreements in 2015, aiming to keep global warming well below 2°C.

Nicola Tangen, CEO of the Norwegian Sovereign Wealth Fund, emphasizes the importance of ESG in managing climate as a financial risk.

The excitement around ESG peaked in 2021 at COP26, with the Glasgow Financial Alliance for Net Zero gaining support from major financial institutions.

There is a significant difference between declaring support for ESG and actually implementing it.

The ESG hype cycle is considered over, with a shift towards disillusionment and a more realistic approach to ESG practices.

Vladimir Putin's invasion of Ukraine has been a turning point for ESG, shifting focus from climate to energy security.

Tucker Carlson has been influential in leading a US political backlash against ESG, contributing to its decline in popularity.

Asset managers like BlackRock and JP Morgan Asset Management have been under pressure to reduce their focus on ESG.

Larry Fink, CEO of BlackRock, has become a central figure in the ESG narrative, advocating for the integration of ESG into capitalism.

The rise of ESG saw significant inflows into ESG funds, but recent trends show a decline in the US, with nearly $9 billion pulled out.

There is a growing call for regulation in the ESG ratings industry due to inconsistencies and confusion among investors.

ESG ratings are subjective opinions, leading to different interpretations and results, which can create confusion for investors.

Desiree Fixler, a whistleblower from DWS, exposed the gap between public ESG claims and actual practices within investment firms.

ESG is not about doing good but about being a long-term, sensible investor, focusing on financial returns and risks.

The future of ESG may involve it becoming an embedded part of the investment process rather than a separate label.

The term ESG might fall out of fashion, but the principles of sustainability and long-term thinking will persist in investing.

There is a significant generational shift in attitudes towards capitalism and ESG, with younger generations demanding action on climate change.

The green transition presents economic opportunities, and investing in green technologies is seen as a prudent move for the future.

Transcripts

everywhere now 2024 tumble weed was it

all just a meaningless marketing

exercise or has the way people invest

our pensions and our savings has that

genuinely changed ESG is the next

evolution of capitalism when we talk

about ESG we are talking about the

future of

humankind the story of ESG is a

multi-trillion dollar marketing scheme

it's a story about hype ambition

Humanity responding to a set of

inconvenient truths with something short

of real solutions the ESG hype cycle is

over those three letters may even

disappear and we're going to move to a

much much better place because of

[Music]

it ESG is trying to think of ways to

invest money in companies whether they

are company bonds or stocks in a way

that helps the environment rather than

hurts it in a way that advances social

aims rather than harms them and in a way

that encourages companies to be governed

properly soundly with lots of checks and

balances and with appropriate controls

so the E is environmental the S is

social and the g is governance the term

became trendy in the aftermath of the

Paris agreements in 2015 to keep global

warming well below 2° above

pre-industrial levels there was quickly

realization that the private sector

would have to play its part in

that I'm Nicola tangan and uh I'm the

CEO of the Norwegian Sovereign wealth

fund we run $ 1.6 trillion dollar and we

own roughly one and a half% of all the

listed equities around the world ESG is

very very important climate is a

Financial Risk now we are invested in

all the companies across the world and

and so if one company pollutes we will

pick it up in the rest of the portfolio

if you have a long-term View and you

really care about both the climate and

the financial returns you have to care

about these things there was a period in

the late 201s when I couldn't pick up

the phone or open up my email without

being bombarded with people just

desperate to talk to me about their ESG

credentials and now

2024 tumble weed it does not come up in

conversation at all

[Music]

the excitement around ESG reached its

peak in 2021 at the cop 26 climate

conference in Glasgow in the UK there

was a big announcement that glasgo

Financial Alliance for Net Zero most of

the biggest financial institutions in

the Western World declared their support

for efforts to reach Net Zero carbon

emission but there is a big difference

between declaring one supports and

actually acting on it I feel the ESG

hype cycle is over I think we are at

that point of disillusionment the ESG

party as we know it is over so I would

think about the ESG industri is having

produced some good things that we need

to keep some bad things we don't ESG is

here to say but it's not going to be a

linear Journey the question is who

killed the ESG party there's a number of

suspects

[Music]

our first suspect is Vladimir Putin one

of the really big moments for the ESG

industry was that invasion of Ukraine

higher hydrocarbon prices just following

the Ukraine Invasion the higher cost of

capital with the increase in interest

rates have hurt the performance of ESG

driven strategies so if you're an ESG

investor during that period Then you are

dramatically underperforming The Wider

Market which is being boyed by oil and

gas dogs Russia's invasion of Ukraine

had the effect of putting more focus on

energy security and safety rather than

thinking about climate while markets

were going up and everyone was safe we

could spend all our time arguing about

es and G as soon as the world got

scarier add a bit of Co plus a bit of

geopolitical tension War Warheads

Invasion tanks suddenly we all woke up

and went boy oh boy this stuff is

immaterial compared to what's going on

in the real world surely it makes sense

to help fund the companies that provide

the ammunition that countries need to

defend themselves from hostile actors

and this was one of the things that made

people think hang on do these criteria

actually make any sense people forget

that the oil and gas sector the energy

sector has underperformed the S&P 500

for the last 10 years people keep

waiting for this the last Hara when will

it finally make me more money than my

Tekken Ms and get the war in Ukraine you

get this Spike get off of fossil fuels

if they're the cause of the problems

move quickly away from the cartel of

fossil fuel providers move to this new

system wind and solar if you can capture

it and store it and you can make it a

source you don't need to be transporting

it around the world having Wars

intervening with your pipelines and so

on our next suspect is taker Carlson he

was instrumental in leading this us

political backlash against against ESG

because of ESG Germany is now rationing

electricity because of ESG farmers are

in Revolt in the Netherlands

Carlson is arguably more responsible

than any other individual for dragging

ESG Into the Heart of the culture

wars Carlson helped to move the

political needle in such a way that

we've now seen

very high-profile politicians notably

Florida Governor Ronda santis talking

about ESG all the time we've seen

financial institutions under really

quite serious pressure through various

means including withdrawing billions of

dollars in portfolio assets from certain

asset managers which is what some

Republican state governments have been

doing it's not really that surprising

therefore that a lot of them are at the

very least going a lot quieter on all

this

ESG promotional stuff separately to G

fans there's been another initiative

also very important called climate

action 100 plus asset managers using

their clout to put pressure on the

companies that they invest in the first

phase was very much focusing on

disclosures second phase was what

companies were actually doing so we're

no longer just talking about disclosing

data we're talking about companies

taking action to reduce their emissions

some of the members particularly us

members Black Rock JP Morgan Asset

Management Pimco Invesco State streets

at this point they got worried it might

not be in the interests of of their

clients of their investors for these

asset managers to be telling all these

companies to reduce their emissions

blackr which is by far the biggest asset

management company in the world became a

central part of this story partly due to

to the role played by his chief

executive Larry thinkink there was a

period when he seemed to be arguably the

most prominent standard Bearer for ESG

Larry's Vision around how we can use the

gears of capitalism to fix its own

shortcomings Capital starts to flow

towards more responsible providers in

society this was all a very alluring

thesis because you make money and you

improve the world at the same time Black

Rock and Larry think in particular

became really Central targets for those

political and media attacks especially

from the right black crck has certainly

become less vocal around ESG in fact

Larry think now says that he prefers not

to to use that that term do I think he's

one of the bad guys I don't they've

created some of the biggest clean energy

funds in the world that are making money

for their investors that's their job

they do that very very well was there a

lot of um pressure on him politically

yeah and did he fold a little bit yes he

did but I think anybody under that kind

of pressure would have responded in the

same human way in 2022 Northern Trust

put out one of its regular surveys to

get an idea of what the priorities are

for asset managers and in 2022 at the

start of that year before Russia's

invasion of Ukraine ESG was top of the

list 2024 it has absolutely dropped down

the list in Europe there is far more

support from government regulations

public opinion is probably

more positive on sustainability the oil

and gas industry is simply a bigger part

of the economy in the US than it is in

Europe there is a much higher proportion

of the population in the US who question

the science of climate change the change

we've seen in the US is uh worrisome

because there is less focus on the

climate initiatives that the companies

take it has not changed the way we do

our business we have roughly 3,000

meetings with compies every year we

would discuss governance and of course

also climate we vote at uh roughly

12,000 agms every year on 12,000

proposals even though we only uh account

for 1 and a half% of all the votes in

the world we also see that we have

roughly an additional three percentage

points of kind of additional influence

I.E other shareholders who follow what

we do and we've also seen in terms of

the flows of money we've seen bigger

changes in the US than in Europe

some in the asset management industry

saw the rise of ESG as a great

opportunity inflows into ESG funds were

really really strong on both sides of

the Atlantic in the first quarter of

2024 we still saw inflows into

sustainability Focus funds in Europe to

the tune of something like 11 billion

whereas in the US it was the single

worst quarter that morning star has

recorded nearly 9 billion dollars came

out of sustainability funds es andg or

three letters that do not leave your

mouth if you are on marketing trips

across various States in in the US if

you're an asset management firm do I

think the big asset managers uh helped

end the party no I think big asset

managers smell the wind and if they

think there's a backlash they'll be very

very fast to change

course tar fany previously the chief

investment officer for sustainable

investing at BlackRock has since become

a vocal critic of the approach to ESG

that's been taken in large parts of the

asset management and financial industry

the ESG thesis around Society improving

because companies discover social

purpose it's a free market self-corrects

thesis right it's a neoliberal the free

market will figure this out cuz people

will have new data Frameworks and

companies will start to do the right

thing on their own if you're a consumer

facing brand you know it's not a good

idea to have a supply chain issue with

you know with with slave labor but for

the majority of the companies in the

economy it doesn't really matter the

reality is they're going to do whatever

the cheapest thing they can do is and

they're going to do that within the

rules and I don't think that we should

impune business people for making the

decisions that are in the interest of

their shareholders they're playing the

game exactly the way they should be and

his argument is that the appropriate

response to to climate change and these

other challenges must involve policy

from Democrat atically accountable

government what do we actually need to

do to address some of these problems and

where does that incur short-term

sacrifice and how do we impose those

sacrifices in a way that's mandatory and

systemic maybe in the absence of serious

government

action there is a real tension between

fiduciary duty and the kind of action

that climate action 100 plus was calling

for you should have a reasonable

expectation that wherever you've got

your pension money parked someone

somewhere is doing the best possible job

they can to make as much money for you

as possible how would you

feel if the asset manager running your

pension plan made certain ESG

assumptions that you don't agree with

and what happens if those assumptions

are wrong they're too severe and that

actually costs you 2 to 3% a year on

financial performance I think climate

risk the challenge is that it's it's

quite long term so a lot of investment

strategies have a horizon that really

doesn't think about you know about the

long term if you are a short term hge

fund you're going to own the Securities

for you know 24 hours you may not care

but if you are a universal owner that

are that is going to own that Securities

for 50 years you are going to Care

immensely about what's going to happen

to that company in 30 years time we

could be through two degrees we could be

past tipping points we could be in

climate chaos investing to avoid that

happening is the most responsible thing

you could do as a fiduciary we have one

overriding goal with this firm and that

is to make money climate is a Financial

Risk you need to take it into

consideration in order to fulfill your

fiduciary duty to your investors another

suspect would be Desiree

fixler desire fixler was the head of ESG

at d WS big German asset management

company spun out of Deutsche Bank she

really exposed the Practical problems

that big investment firms have measuring

this investment for good and proving

this investment for good there was a

tremendous gap between what the company

was saying publicly about their ESG

capabilities to what they were actually

doing internally you can't mislead your

shareholders and investors you can't

misrepresent and you certainly can't

missell your

products wire card was placed as a top

position in a DWS ESG Flagship Fund in

2020 so at a time when eny won't sign

off on their financials DWS actually

upgrades wire card on better corporate

governance and sites business ethics

Marcus Brown the CEO of wireart has been

arrested Yan maralik is on the run and

the company's insolvent there was a

statement once made that uh from the CEO

you and your American friends are

paranoid my American friends like you

talking about this SEC and the

doj I was a tremendous pain in the ass I

just didn't stop and finally um at my

last board meeting I pretty much like

banged on the table that these are

Urgent issues it was a matter of a few

weeks later I got

fired I knew that greenwashing was

absolutely pervasive in the market ESG

became a huge marketing tool for other

asset managers I knew that most of the

claims out there were I decided

to go public I had documents I had

evidence it's really been one of the

most impactful whistleblower allegations

there was a high-profile raid by

authorities in Germany on a DWS office

DWS dramatically reduced the quantity of

assets that it claims to manage under

ESG principles I know that I definitely

contributed to to killing this ESG

party one of the biggest problems with

ESG is how do you measure this stuff

that's created an opportunity for

ratings and index providers the biggest

of which in the ESG space is a company

called msci so an ESG rating is an

opinion how those variables will impact

the financials of that company the way

that I want to measure it will almost

certainly be different from the way that

you would want to to measure we're going

to arrive at different opinions we're

going to arrive at a different rating

we're not just talking about climate

stuff we're also talking about social

stuff and governance stuff different

ways of measuring virtue come up with

different results it is something that

will develop over time clearly it takes

effort to understand those

characteristics and it will take even

more to price those characteristics into

the value of assets and to the

allocation of capital I've had many

conversations with clients where they

were very confused by some of the rating

agencies where the same company was

rated very highly by one agency and very

poorly by another agency controversy

around that industry has led to Growing

calls to regulate them and and we're

seeing movements around that

particularly in the EU you cannot

regulate ratings themselves regulation

uh on

ESG has to uh be more on on the

ingredients that you're using to come up

with a rating if I'm an investor and I

look at an opinion by Ms and I look at

opinion by others and then I form my own

opinion that's a richer world than

simply somebody giving it to you

directly when you go buy a product in a

supermarket it's going to tell you what

the ingredients how much salt they have

how much sugar how much you know fat and

other other other sources you're not

going to tell people whether they should

eat a sausage that is a free choice in a

society there is a need to

scrutinize data but in the end when it

comes to opinions rather than data

diversity of opinion actually enhances

the investment process it's not really

possible to prove whether a company is

completely green what if the product

that it produces is green but that

further down the supply chain the other

companies that it relies on what if they

don't quite meet the same criteria what

if they're not quite as virtuous as the

ultimate company that an investor is

choosing to invest in ESG is an umbrella

term and it means many different things

to different people it can be a risk

management feature how the outside

changing world might affect the company

you're investing in it can also mean how

the company you're investing in affects

the outside world the idea was that you

take es factors

into consideration when you look at a

stock or a bond or an asset but that

morphed in people's minds to thinking

that ESG is a measure of a company's

goodness does it do the right thing by

the environment does it have a nice

culture is its governance any good and

if I buy a company with a good ESG score

I'm buying a good company that is

nonsense ESG is not about doing good

it's about being a long-term sensible

investor if you're a long-term

shareholder and you care about financial

returns you need to care about the

climate as well because the climate

effect for instance on inflation is

stronger than it's ever been before we

see it in in harvests we see it in

reinsurance um premiums you need to care

about uh executive pay because you want

to have a sustainable uh situation you

need to care about diversity at board

level because those boards with better

diversity generally perform better what

does climate have to do with like labor

laws in a certain country you know or

diversity and inclusion so an alert

system morphed into an investment

strategy those are two very different

concepts one is risk management the

other one is positive impact if

something has an ESG label on it my mom

will think it must be full of good

companies no I might go into a client

and show them a company that they think

is bad and they'll go you've got an oil

company or an airline or a cement

company in your portfolio it's got a low

ESG score why is that and I'll say well

it's so cheap that it takes those risks

into consideration and we think it's an

attractive investment I'm using

definition one they are using definition

two and we don't understand each other

and that is a fundamental problem that

is still around in the industry was sort

of Smashing together a bunch of things

that are unrelated so that you can have

a very simple single indicator of virtue

while minimizing tracking error you know

against an index and the goal is

ultimately if you could figure out how

to take your product and make a few

changes such that the return Dynamics

are the same or very similar but you

have a slightly Greener basket right

which might just mean as we saw you know

underweighting fossil fuel players and

then overweighting tech companies and

what Wall Street played on dressing up

riskmanagement products on weal run

companies investors were thinking they

were investing in portfolios that were

offering environmental and social

benefits that wasn't the case at

all our final suspect is Stuart Kirk

Stuart Kirk worked as an F journalist

and then went on to work as the head of

responsible investing at HSBC asset

management and he was in that role when

he came to give a short speech at an ft

moral money conference

in London Sharon said we are not going

to survive and indeed no one ran from

the room in fact most of you barely

looked up from your mobile phones at the

prospect of nons survival the Sharons

and the maranes of this world need to

tell us why prices are going up with our

own demise I was in the room when he

made that presentation it did go down

like a cup of cold sick he did open up a

conversation around the in

inconsistencies that are inherent in ESG

that that wasn't previously there so he

has to take a share of the blame here

I'm afraid and I don't think he imagined

that it would gain quite as much

momentum as it did or lose him his job

to be suspended straight away is

discombobulating I still have not to

this day spoken to any of my colleagues

horrendously stressful for anyone who

does this for a living anyone who's got

four children anyone who's got a

sensible job and has tried to work hard

and do the best they can for their

employer which I've always done now I've

been through a lot of bubbles bubbles

emerging market bubbles you could always

say stocks were overvalued I think this

is nonsense here's another Viewpoint and

you would debate it within a firm never

in my life have I been in a bubble where

you could not critique it at all with

risk of losing your job if my sacrifice

was worth anything it was allowing

people for the first time to voice

legitimate and necessary criticisms of

something which needed to be open um and

I know that from the thousands of emails

I got from people saying I was also

fired for making a mild criticism of

ESG over the past two or 300 years

Global growth Global development

exploded based on a fossil fuel

Foundation we've now realized that

fossil fuels are cooking the planet and

we have to move as rapidly as possible

to the post fossil fuel age that's the

future enormous fortunes will be one and

lost as part of this we need to create

new low carbon performance benchmarks

and that requires a complete rethink by

pension fund trustees to reflect this

world that we need to build instead of

reflecting the world that we're trying

to exit what has gone out of fashion is

the term ESG and maybe that's a good

thing this shouldn't be a party we're

not talking about a party or not a party

we are talking about the future of a

human kind a lot of the same financial

institutions that are telling us to rely

on ESG are active behind the scenes

means taking advantage of you know

traceless and and often Limitless

political spending to influence

policymaking we will not be speaking out

ESG anymore 5 10 years from now and that

is because sustainability will be

embedded in how we invest what I call

option one ESG as an input will just

melt into the existing investment

process and will just disappear because

everyone will realize we should all be

doing that anyway

the exciting thing will turn to the the

goodness scores and funds will be

properly labeled and they will have a

big thing on the top saying this

goodness may affect your returns and

someone will go you know what I don't

mind 4 and a half% instead of six and

they will choose those funds

legitimately and everyone will be happy

for anybody to think or say that ESG is

dead that isg is not going anywhere that

it was just a label that is just a

political philosophy I'm sorry to say

they're all wrong we think ESG is about

as political as gravity it's not

political it's about thinking long term

and it's about thinking about your

returns this is the death now for fossil

fuels and people holding oil and gas

thinking that they this is a long-term

growth opportunity they're going to be

get caught

short the majority of j z and

Millennials don't believe in capitalism

leaders of that system stand up on a

stage and they say we know these are big

problems climate change is critical we

have to solve them and they talk about

ESG and stakeholder capitalism and every

single year those young kids who again

they didn't learn you know climate

change is real because they watch a

documentary years after they left school

they learned it like we learned Newton

and gravity right so they know it's real

they see the leaders of the system say

that oh it's really important we're

going to do something about this and

every single year profits keep going up

and the scientists tell us that we're

getting further and further behind

there's a significant concern I have

that we'll see political instability as

people try to overthrow the economic

system long before we actually get to

2050 right and see if Net Zero actually

plays out there is money to be made from

the green transition it makes perfect

sense to put my pension money and yours

into green technologies that are going

to be used all over the world and that

are essential if we're going to get

ourselves out of this climate hole

what's important is that serious work is

done to really grapple with the

challenges and the opportunities that we

face and those who do it right will be

surfing the way of the single biggest

economic transformation and one of the

biggest opportunities in the whole

history of human civilization