In 2021, almost two-thirds of respondents said they considered environmental, social and governance (ESG) factors when investing. Last year, that number was 60 percent, and this year it is 53 percent, the Association of Investment Companies’ annual ESG Attitudes Survey showed. Asked why they were over ESGs, the top reason given was that performance was more important.
Next up: greenwashing. In 2021, only 48 percent of investors said that they were “not convinced by ESG claims from funds.” That number is now up to 63 percent. The same investors look like they are putting their money where their mouths are: The most recent data from the Investment Association showed one-third month of outflows from the Responsible Investments category — a record ￡448 million (US$546 million) in August.
Anyone in doubt about the market’s attitude toward ESG investing today only has to look at the share price of Impax Asset Management Group PLC. It rose 33 times from late 2015 to late 2021, but has since plunged 70 percent. Bubble, bubble crash.
Illustration: Yusha
The exodus makes complete sense. That is partly about performance. It is a lot easier to feel pro-ESG when it is making you a big pile of money, as it was three years ago. It is harder when you are underperforming — and when the stuff you were told is absolutely not OK to touch with a barge pole is doing just fine. Note that the S&P Global Clean Energy Index is down 30 percent year-to-date and 12 percent over three years (low interest rates do not suit the kind of long-duration companies that make up this sort of index).
Meanwhile, the S&P 500 Energy gauge is flat year-to-date, but up 43 percent over the past three years. In the UK, shares of Shell PLC hit an all-time high this week.
Yet it is not just about performance. It is also about the constantly changing definitions of ESG. Remember how defense stocks used to be not OK. No longer. As soon as Russia invaded Ukraine, it became clear to all but the most ideologically blinkered that having adequate national defense is the very definition of a social good (assuming you believe in democracy and freedom, of course). In a war, defense is about as ESG as you can get. It is also one of the few areas where, sadly, you can be sure the money should keep pouring in: Right now, only 11 members of NATO spend 2 percent of GDP on defense. That might change as everyone recognizes that short-term higher defense spending is the only option and that the long-term deterrence it provides is the best economic insurance money could buy.
The sands have shifted in energy investing, too. Is it good governance and a social essential to provide energy security to your population? Of course. Does that, in the short and medium-terms at the very least, involve fossil fuels? Of course. Yet in the longer term, it also involves an awful lot of digging, something that now makes mining full-on ESG.
A note just out from asset manager Janus Henderson Group PLC titled “Doing Good Feeling Good” explains it this way: Many investors have been focused on investing in firms with high ESG ratings and low emissions, portfolio manager Tal Lomnitzer wrote. Yet along the way they have given too little thought to “the vast quantities of critical enabling raw materials required to build the low-carbon economy such as copper, lithium, cobalt, nickel, steel and rare earths.”
Yet without these — and the mess their extraction creates — “there can be no low-carbon future,” Lomnitzer wrote.
One example from the International Energy Agency puts it this way: At the moment, total annual global nickel production is about 2.8 million tonnes; by 2040, the electric-vehicle and battery-storage sector alone would require 3.3 million tonnes. Green is grimy. Time to accept that and consider that perhaps these unpleasant-sounding industries — with their massive diesel machines, low levels of diversity and disruptive use of resources such as water — are actually “doing good” by enabling a low-carbon future.
Things need to get dirtier to have any hope of ever getting cleaner. Or as GMO LLC’s Jeremy Grantham said in our Merryn Talks Money podcast last week: “Sorry purists.”
You could take this pragmatic approach to ESGs as far as you like. Take tobacco companies. It would obviously be better if they had never existed and if they disappeared faster. Yet you have to admit, they are remarkably well-run: They have survived longer and chucked out more cash in dividends for our pensioners than anyone could possibly have imagined when the consequences of smoking became clear. Think too of the amount of tax they pour into our treasuries — cash that in some estimates outweighs the medical costs of dealing with ill smokers and that finances other parts of the state. Is that a social good? Most of us would say it is definitely not enough of one, but you get the point — it is hard to find absolutes.
The idea of ESGs has been changing since the day it was just a twinkle in a marketing man’s eye. Yet it is now heading into its inevitable end game: the bit where the pragmatic can make pretty much any well-run company fit one ESG metric or the other. The key word here is well-run. As London Business School finance professor Alex Edmans said: “ESG is both extremely important and nothing special.”
It is important because good relationships with suppliers, customers, employees and communities are vital for the long-term success of a company, and nothing special because that is not exactly new news. Take out the tick box “woke” element that fund management marketers have added over the past decade, and we are back to understanding that good companies have always thought about this stuff — just without the relentless greenwashing and grandstanding.
Merryn Somerset Webb is a senior columnist for Bloomberg Opinion, covering personal finance and investment, and host of the Merryn Talks Money podcast. Previously, she was editor in chief of MoneyWeek. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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