Who killed the ESG party? | FT Film

Summary

The script discusses the evolution and current state of ESG (Environmental, Social, and Governance) investing, questioning whether it's a genuine force for change or a marketing ploy. It explores the impact of geopolitical events, regulatory challenges, and the backlash against ESG from influential figures like Tucker Carlson. The conversation highlights the complexities and potential of ESG in shaping future investment strategies.

Takeaways

• 🌐 ESG (Environmental, Social, and Governance) was a major focus in investment discussions but has seemingly lost momentum by 2024.
• 🌱 ESG is seen as an evolution of capitalism, aiming to invest in a way that benefits the environment, society, and encourages good governance.
• 💼 The term ESG gained popularity post the 2015 Paris Agreements, highlighting the need for private sector involvement in combating climate change.
• 🔍 Despite its initial hype, ESG has faced criticism as a marketing scheme rather than a genuine solution to environmental and social issues.
• 📉 The ESG hype cycle is considered over, with some predicting a shift towards more effective and practical approaches to sustainability.
• 🌍 The invasion of Ukraine by Russia and the subsequent energy crisis have redirected focus from climate concerns to energy security, impacting ESG performance.
• 👨‍💼 Influential figures like Tucker Carlson have led a political backlash against ESG in the US, influencing public and institutional perspectives.
• 🏦 Asset managers like BlackRock, once champions of ESG, have become more cautious in their approach due to political and media scrutiny.
• 📊 The challenge of measuring ESG effectiveness has led to inconsistencies and skepticism, with different rating agencies providing conflicting assessments.
• 💡 The future of ESG may involve a shift from a standalone focus to integrating sustainability considerations into the core investment process.
• 🌿 Despite setbacks, there is a belief that the principles of ESG will continue to influence investment strategies, particularly in response to climate change and the need for a sustainable future.

Q & A

What does ESG stand for and what is its purpose?

ESG stands for Environmental, Social, and Governance. It is a framework used by investors to evaluate companies not only on their financial performance but also on their sustainability and societal impact. The 'E' stands for environmental factors, focusing on how a company's operations affect the environment. The 'S' stands for social factors, considering how the company interacts with its employees, suppliers, customers, and the community. The 'G' stands for governance factors, examining the leadership, executive pay, audits, internal controls, and shareholder rights of the company.

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

The Paris Agreements in 2015 aimed to keep global warming well below 2 degrees above pre-industrial levels. This global commitment to climate change mitigation quickly led to a realization that the private sector would need to play a significant role in achieving these goals. As a result, ESG became a trendy term as investors and companies started to focus more on sustainable practices and their impact on the environment, society, and governance.

What is the Norwegian Sovereign Wealth Fund and how does it relate to ESG?

The Norwegian Sovereign Wealth Fund is a massive investment fund managed by the Government of Norway, with assets worth over $1.6 trillion. It is one of the largest sovereign wealth funds globally and owns approximately 1.5% of all listed equities worldwide. The fund is significant in the context of ESG because it considers environmental, social, and governance factors in its investment decisions, recognizing that climate change and other ESG-related issues can pose financial risks to its portfolio.

What was the significance of the Glasgow Financial Alliance for Net Zero, and how does it relate to ESG?

The Glasgow Financial Alliance for Net Zero was a major announcement during the COP26 climate conference in 2021. It involved most of the largest financial institutions in the western world declaring their support for efforts to reach net-zero carbon emissions. This commitment is directly related to ESG, as it represents a significant step by the financial sector to address environmental factors, particularly the 'E' in ESG, by aligning their investments with the goal of reducing greenhouse gas emissions.

Why did the excitement around ESG seem to decline by 2024?

The script suggests that the excitement around ESG declined due to several factors. One major factor was the invasion of Ukraine by Russia, which led to higher hydrocarbon prices and a focus on energy security rather than climate change. Additionally, the underperformance of ESG-driven strategies during this period, as oil and gas stocks performed well, made ESG investments less attractive. Furthermore, political backlash, particularly in the US, led by figures like Tucker Carlson, contributed to a shift in public and investor sentiment away from ESG.

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

Tucker Carlson, a prominent conservative commentator, played a significant role in leading a political backlash against ESG in the US. He criticized ESG for its perceived negative impacts, such as electricity rationing in Germany and farmer revolts in the Netherlands, due to environmental policies. Carlson's influence helped to move the political needle, leading to high-profile politicians like Florida Governor Ron DeSantis discussing ESG and financial institutions facing pressure, including the withdrawal of billions of dollars in assets.

What are the concerns about ESG ratings and how they are measured?

The script highlights concerns about the subjectivity and inconsistency in ESG ratings. Different rating agencies may have different criteria and methodologies, leading to varying opinions and ratings for the same company. This inconsistency can confuse investors and lead to calls for regulation. The challenge lies in measuring the complex and multifaceted aspects of ESG, including environmental impact, social responsibility, and governance practices.

How does the script suggest the future of ESG in investment practices?

The script suggests that while the term 'ESG' may go out of fashion, the principles it represents will become more deeply embedded in investment practices. It predicts that sustainability will be integrated into how investments are made, rather than being a separate, labeled category. This integration will lead to a more holistic approach to investing, considering long-term impacts and returns, rather than just short-term financial gains.

What is the role of government policy in addressing climate change and other ESG-related issues?

The script implies that while ESG is an important tool for investors to consider environmental, social, and governance factors, the ultimate solution to issues like climate change requires action from democratically accountable governments. Policy and regulation are necessary to impose systemic changes and ensure that companies take the necessary steps to reduce their environmental impact and operate responsibly.

What impact does the script suggest the green transition could have on the economy and investment opportunities?

The script suggests that the green transition presents a significant economic opportunity. There is potential for enormous wealth to be created and lost as the world moves towards a post-fossil fuel age. Investments in green technologies and sustainable practices are not only environmentally responsible but also financially prudent, as they align with the long-term economic transformation towards sustainability.

Outlines

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Keywords

💡ESG

ESG stands for Environmental, Social, and Governance, which are three central factors used to measure the sustainability and ethical impact of a company. In the video, ESG is the main theme, representing an investment approach that considers these factors to ensure positive impact on the environment, society, and corporate governance. The script discusses the evolution and hype around ESG, including its role in marketing and its impact on investment strategies.

💡Sovereign Wealth Fund

A Sovereign Wealth Fund (SWF) is a state-owned investment fund composed of assets such as stocks, bonds, real estate, or other financial instruments. In the script, Nicolai Tangen, CEO of the Norwegian Sovereign Wealth Fund, emphasizes the importance of ESG, highlighting how climate is a financial risk and how their fund, with substantial global equity ownership, integrates ESG into their investment decisions.

💡Net Zero

Net Zero refers to a state where the amount of greenhouse gases emitted is balanced by the amount removed from the atmosphere, effectively having zero impact on the climate. The script mentions the Glasgow Financial Alliance for Net Zero, illustrating the commitment of financial institutions to support efforts aimed at achieving this environmental goal.

💡Greenwashing

Greenwashing is the act of making a product, company, or policy appear environmentally friendly when it is not. The script refers to the prevalence of greenwashing in the ESG market, as exposed by Desiree Fixler, a former head of ESG at DWS, who criticized the discrepancy between public ESG claims and internal practices.

💡Fiduciary Duty

Fiduciary duty is the legal obligation of an asset manager to act in the best interest of their clients, prioritizing their financial gains. The script discusses the tension between ESG considerations and fiduciary duty, questioning whether prioritizing ESG factors could potentially conflict with maximizing returns for investors.

💡Asset Managers

Asset managers are professionals who manage and invest funds on behalf of clients. The script discusses how asset managers have been at the forefront of the ESG movement, with some facing backlash for their ESG-driven strategies, and others adjusting their approaches in response to changing public opinion and regulatory environments.

💡Climate Risk

Climate risk refers to the potential negative impacts that climate change can have on businesses and investments. In the script, it is mentioned as a financial risk that asset managers must consider as part of their fiduciary duty, emphasizing the long-term implications of climate change on investment portfolios.

💡Goodness Score

A goodness score, as discussed in the script, is a hypothetical measure of a company's positive impact on society and the environment. It represents a possible future metric that could replace or supplement ESG ratings, providing investors with a clearer understanding of the ethical and sustainability aspects of their investments.

💡Whistleblower

A whistleblower is an individual who exposes unethical or illegal practices within an organization. Desiree Fixler is mentioned in the script as a whistleblower who revealed the greenwashing practices at DWS, contributing to the decline of the ESG hype by shedding light on the discrepancies in the industry.

💡Political Backlash

Political backlash refers to the strong negative reaction from certain political factions against a particular policy or trend. The script discusses the backlash against ESG, particularly in the US, led by figures like Tucker Carlson, which has contributed to the shift away from ESG as a dominant investment focus.

💡Gen Z and Millennials

Gen Z and Millennials are the younger generations, often associated with greater concern for social and environmental issues. The script highlights their skepticism towards capitalism and the perceived disconnect between corporate promises of ESG initiatives and actual outcomes, suggesting a potential source of future social and economic change.

Highlights

ESG (Environmental, Social, and Governance) was a prevalent topic but has seemingly faded by 2024.

ESG is considered the next evolution of capitalism, focusing on future humankind.

Critics view ESG as a multi-trillion-dollar marketing scheme with more hype than real solutions.

The ESG hype cycle is believed to be over, potentially leading to better future practices.

ESG aims to invest in companies that positively impact the environment, society, and governance.

The term ESG gained popularity post the 2015 Paris Agreements, emphasizing the private sector's role in combating climate change.

Nicolai Tangen, CEO of the Norwegian Sovereign Wealth Fund, emphasizes the financial risk of climate change and its impact on investments.

The late 2010s saw an overwhelming interest in ESG credentials, which has since diminished by 2024.

The excitement around ESG peaked in 2021 during the COP26 climate conference in Glasgow.

The difference between declaring support for net-zero carbon emissions and actually implementing such measures is significant.

Vladimir Putin and the invasion of Ukraine are cited as factors that shifted focus from climate to energy security, affecting ESG performance.

Tucker Carlson is credited with leading a US political backlash against ESG, influencing public and political opinion.

Asset managers like BlackRock have been criticized for their approach to ESG, leading to a shift in their public stance.

The inconsistency in ESG ratings and the lack of a standardized measurement system have been highlighted as issues.

Desiree Fixler's whistleblowing exposed discrepancies in ESG practices at DWS, impacting the industry's credibility.

Stuart Kirk's critique of ESG at an FT conference sparked discussions on the inconsistencies within the ESG framework.

The future of investing is predicted to integrate sustainability, moving beyond the term ESG to a more embedded approach.

The green transition presents significant economic opportunities and challenges that need to be addressed seriously.

Transcripts

ESG was everywhere.

Now, 2024, tumbleweed.

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 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,

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 degrees above pre-industrial levels.

There was quickly a realisation that the private sector would

have to play its part in that.

I'm Nicolai Tangen and I'm the CEO of the Norwegian Sovereign

Wealth Fund.

We run $1.6tn and we own roughly 1.5 per cent 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 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 2010s,

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, tumbleweed.

It does not come up in conversation at all.

The excitement around ESG reached its peak

in 2021; the COP26 climate conference in Glasgow in the UK.

There was a big announcement, the Glasgow 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's support

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 industry as having produced some

good things that we need to keep, some bad things we don't.

ESG is here to stay, but it's not

going to be a linear journey.

The question is: who killed the ESG party?

There's a number of suspects.

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 costs 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 buoyed by oil and gas stocks.

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&G. As soon

as the world got scarier, add a bit of Covid

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,

did 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 the last hurrah.

When will it finally make me more money than my tech

investments?

And 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

and move to this new system, wind and solar.

If you can capture it and store it

and you can make it at 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 Tucker Carlson.

He was instrumental in leading this US political backlash

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 Ron DeSantis,

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 GFANZ, there's been another initiative,

also very important, called Climate Action 100+,

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,

BlackRock, JPMorgan Asset Management, Pimco, Invesco,

State Street, at this point they got worried.

It might not be in the interests of their clients,

of their investors, for these asset managers

to be telling all these companies

to reduce their emissions.

BlackRock, which is by far the biggest asset management

company in the world, became a central part of this story,

partly due to the role played by its chief executive, Larry Fink.

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.

BlackRock, and Larry Fink in particular,

became really central targets for those political and media

attacks, especially from the right.

BlackRock has certainly become less vocal around ESG.

In fact, Larry Fink now says that he

prefers not to use 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, with a lot of 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 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 companies every year.

We would discuss governance, and of course, also, climate.

We vote at roughly 12,000 AGMs every year on 120,000 proposals.

Even though we only account for 1.5

per cent of all the votes in the world,

we also see that we have roughly an additional 3 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-focused funds in Europe to the tune

of something like $11bn, whereas in the US it was the single

worst quarter that Morningstar has recorded.

Nearly $9bn came out of sustainability funds.

E, S, and G are three letters that

do not leave your mouth if you are

on marketing trips across various states in the US,

if you're an asset management firm.

Do I think the big asset managers 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.

Tariq Fancy, 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.

It's a neoliberal, the free market

will figure this out because 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,

it's not a good idea to have a supply chain issue with slave

labour.

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 impugn 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 climate change and these other challenges

must involve policy from democratically accountable

governments.

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+ 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 per cent to 3 per cent a year on financial performance?

I think climate risk...

the challenge is that it's quite long-term.

So a lot of investment strategies

have a horizon that really doesn't

think about the long term.

If you are a short-term hedge fund,

you're going to own the securities for 24 hours.

You may not care.

But if you are a universal owner 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 2 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 fulfil your fiduciary duty to your investors.

Another suspect would be Desiree Fixler.

Desiree Fixler was the head of ESG

at DWS, 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 mis-sell your products.

Wirecard was placed as a top position in a DWS ESG flagship

fund in 2020.

So at a time when E&Y won't sign off on their financials,

DWS actually upgrades Wirecard on better corporate governance

and cites business ethics.

Marcus Brown, the CEO of Wirecard, has been arrested,

Jan Marsalek is on the run, and the company is insolvent.

There was a statement once made from a CEO:

"You and your American friends are paranoid."

My American friends?

Is he talking about the SEC and the DoJ?

I was a tremendous pain in the ass.

I just didn't stop.

And finally, at my last board meeting,

I pretty much 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 bullshit.

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's claimed to manage under ESG principles.

I know that I definitely contributed

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 measure it.

We're going to arrive at different opinions.

We're going to arrive at a different rating.

Because 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 we're seeing movement around that,

particularly in the EU.

You cannot regulate ratings themselves.

Regulation on ESG has to be more 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 MSCI,

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 are,

how much salt they have, how much sugar, how much

fat and other sources.

You're not going to tell people whether they

should eat the sausage.

That is a free choice in a society.

There is a need to scrutinise 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&G 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 effects, for instance,

on inflation is stronger than it's ever been before.

We see it in harvests.

We see it in reinsurance premiums.

You need to care about executive pay

because you want to have a sustainable 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 labour laws in a certain

country 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 mum will think it must be full of good companies.

No.

I might go in to 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.

It 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 minimising tracking error

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

which might just mean, as we saw,

underweighting fossil fuel players

and then overweighting tech companies.

And what Wall Street played on dressing up risk management

products on well-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 FT 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 non-survival.

The Sharons and the Mark Carneys 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 inconsistencies

that are inherent in ESG 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.

And 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 - dotcom 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.

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 200 or 300 years, global growth,

global development exploded based on a fossil fuel

foundation.

We've now realised 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 won 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 are not talking about a party, or not a party.

We are talking about the future of humankind.

A lot of the same financial institutions

that are telling us to rely on ESG

are active behind the scenes, taking advantage of traceless

and often limitless political spending

to influence policymaking.

We will not be speaking of ESG any more 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 realise we should all be doing

that anyway.

The exciting thing will turn to the goodness scores,

and funds will be properly labelled,

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 4.5 per cent instead of 6 per cent.

And they will choose those funds legitimately

and everyone will be happy.

For anybody to think or say that ESG is dead, that ESG is not

going anywhere, that it was just a label,

that it's 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 knell for fossil fuels.

And people holding oil and gas thinking

that this is a long-term growth opportunity,

they're going to get caught short.

The majority of Gen 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 climate change

is real because they watched a documentary years

after they left school.

They learned it like we learn Newton and gravity.

So they know it's real.

They see the leaders of the system say,

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 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 wave of the single biggest economic transformation,

and one of the biggest opportunities

in the whole history of human civilisation.