ESG: Balancing act


28 Jun 2024

Anti-ESG voices are getting louder in the US, while in Europe farmers have protested strongly against green policies. So how can those working to build a sustainable and fairer world win over hearts and minds? Mark Dunne reports.



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Anti-ESG voices are getting louder in the US, while in Europe farmers have protested strongly against green policies. So how can those working to build a sustainable and fairer world win over hearts and minds? Mark Dunne reports.

Santa Barbara in California turned brown over Easter. Mudslides covered roads and neighbourhoods across the county when five inches of rain fell during the three-day holiday. It was worse a month earlier when people were evacuated from the floods that engulfed their homes after seven inches of rain fell in a single day – breaking an almost 100-year-old record.

But what is most interesting about these storms is that Californians typically live with droughts and wild res thanks to rising temperatures and prolonged periods of low rainfall. The extremes of dryness and wetness in the state have been blamed on climate change.

With such severe weather events claiming countless lives, California’s governor, Gavin Newsom, has introduced laws that require companies with revenues topping $1bn to reveal the financial risks they are exposed to from climate change. As part of this they also have to disclose the volume of their greenhouse gas emissions.

But there’s more. It is planned that from 2026 larger companies will have to pay a levy, the size of which will depend on the level of harmful gases they release into the atmosphere.

Yet it appears that Newsom’s attempts to reduce the impact of climate change is not a policy that has been embraced by most US states. Indeed, only 24 have set carbon reduction targets.

And far from ignoring the issue, some states are vocally opposed to decarbonising their economy.

In Texas, some asset managers are being blacklisted in that pension funds in the state are barred from investing in their funds due to their net-zero policies.

This is believed to be the reason why some have quit climate investor bodies such as the Net Zero Asset Managers initiative and Climate Action 100+ in a bid to get back onto the approved list.

But it’s not just decarbonising the economy that is being politicised. Investing with a social mandate is also under scrutiny as it could mean a boycott of the rearms industry. Indeed, in Wyoming investors have to disclose whether or not they consider social aspects when making an investment decision.

An insecure move

One of the reasons for such a backlash against laws designed to tackle the causes and impacts of climate change or investing with an ESG tilt is that they are seen in some quarters as a threat to the capitalist system, that is to say they could make everyone poorer and increase energy insecurity.

Oil and gas transformed the world and gave some people a life-style that previous generations could never have dreamt of when the first commercial oil well opened almost 200 years ago.

So some political figures in the US are openly questioning why they should ditch a reliable and economically successful source of energy for a less efficient system, which may not work if the wind is not blowing hard enough, or if it is too hot for solar panels to work (Yes, really).

The problem is that data has emerged which some believe not only justifies their fears but shows that investing ethically means sacrificing returns. Indeed, most sustainable funds underperformed their conventional peers last year. According to Morningstar, 53% of sustainable funds in the US were in the lower end of the performance spectrum.

And investors have since walked away from sustainable investments. In the opening three months of this year, $8.8bn (£7bn) was pulled from such funds, Morningstar claims.

“When people look at ESG funds versus some other funds, they haven’t looked great recently,” says a senior investment consultant, who did not wish to be named.

However, this may be due to geopolitical events during the past two years, such as wars in Ukraine and the Middle East sending the price of oil higher and therefore boosting the performance of some conventional funds.

But this misses the point. ESG and sustainability are long-term investment themes and long-term investors, like pension schemes, need to be exposed to such themes. These strategies should not be judged on short-term horizons of, for example, 12 months.

Unfortunately, this is not the case.

“People tend to be driven by the last quarter, the last year, the last three years, rather than looking long term,” the investment consultant adds. “That is another challenge [with ESG].”

Political instability

Unfortunately, the sustainability debate is set to intensify in some regions as citizens in more than 50 countries head to the polling booths this year.
 The US is one such country in the middle of a presidential election, which will not help restore confidence in sustainability after last year’s performance.

Instead of making ESG less political, decarbonising the economy and reducing inequality could be issues that will be used to separate the Republican and Democrat presidential candidates leading up to November’s election. But political backing is crucial to making the world fairer and more sustainable.

“In finance we can’t solve all the problems we have with climate and ESG. We need a combination of policy and government stability – so it isn’t helpful that half of the globe is going to the polls this year,” the consultant says.

It’s over here

It appears that the backlash against ESG in the US is spreading to Europe.

Indeed, some livestock farmers are pushing back quite hard against the country’s sustainable policies. This year they have blocked roads with their tractors and occupied public spaces.

Such protests have been happening since 2019 and were triggered by a proposal in the Dutch parliament to halve the level of industrial livestock production in the country in a bid to reduce climate pollution.

But the consultant is not seeing much evidence of a backlash against ESG outside of what he is reading in the press. Despite farmers protesting in the Netherlands, any push back is limited.

“Across different jurisdictions, ESG is embedded into company reporting. People are looking at it, looking at if there is any element of greenwashing. Whether they are doing enough is a different matter, but it is very much on the risk agenda.”

An understanding of the importance of these issues is growing, but there is still some way to go until the approaches towards implementing it and measuring impacts are perfected.

“Think about how the awareness of ESG has grown compared to what it was five years ago,” the consultant says, but concedes that work is needed here. “There are still problems around greenwashing, around taxonomy and the reporting is quite cumbersome. There are opportunities for improvement going forward.”

Inclusive policies

The impact of sustainable policies and investment strategies are not always positive. Transitioning the global economy to renewable sources of energy from extractive forms is a major change. One that could alter the way of life for some and destroy the livelihoods of others.

Indeed, Poland, South Africa and Indonesia are just three of many countries that are economically dependent on coal. The livelihoods of whole communities in these countries depend on local mines. Cutting carbon emissions in these countries is going to be painful.

So making the world a cleaner place that protects the climate and the natural world so that it continues to nourish us with fresh air, clean drinking water, food and medicines needs to consider the impact on communities.

The social aspects of the transition are also an important element of ESG strategies. So providing alternative jobs of quality is a must to make sure that communities are not left behind. But is that message getting through?

“Personally, a just transition doesn’t get enough airtime in the UK,” the consultant says, although there is a leveling-up agenda.
They added that companies are aware of the need for a just transition, especially international pension schemes.

The farming issue in Europe is a prime example of the approach that is needed to bring people on board with accepting more sustainable policies and methods.

Of course, we need nourishment to not only to survive but to flourish, yet with modern animal farming techniques believed to be contributing to climate change we need to find ways of providing the protein we need without it impacting our ecosystem and our nutritional health.

Farming provides whole communities with an income and funds local services, the protection of which we need to balance with protecting the ecosystem and the climate.

These issues cannot be left to the corporate world alone to solve. Governments, companies and investors need to work together.

But governments in the developed world are under pressure as their economies are suffering from low productivity. Indeed, this has led them to pulling back on their sustainable targets, so what message does that send to investors?

A lack of funding is to blame from governments in Europe that are overseeing low productivity caused by falling birth rates, aging populations and rising diagnosis of chronic illnesses.

They also need to fund the repair and upgrade of their aging infrastructure and repay the huge debt created during the Covid pandemic.

Double whammy

So, can we, as France’s president Emmanuel Macron once said, grow the economy and decarbonise at the same time? It’s not going to be easy.
 “We are on a path to de-carbonisation and de-globalisation,” the consultant says.

“It is a question of how quickly and painlessly we get there. We have different headwinds with the cost of living and the energy crisis. All of those things are going to feed through at some stage.”

It is clear that the message on the long-term benefits of decarbonising the global economy and reducing inequality is not getting through to some, who appear to be living in the moment rather than thinking about the long-term impact of climate change and biodiversity loss.

It could be that the decarbonisation goals for 2050 appear too far away for some, while those targeting 2030 are seen as too ambitious and unachievable. But in a time of growing cashflow negativity among defied benefit pension schemes in Britain, some will be focused on where the money will come from today to pay their pensioners.

The risks their portfolios will be exposed to in 10 years’ time is not something they are thinking about if they are having to sell units to meet their obligations. So building a more sustainable world and one that is more equal and safer will mean a seismic change for many.

But with the voices of concern at the changes taking place growing louder, there is a big balancing act between making the long-term changes needed and ensuring that communities are protected in the medium term.

It is a balance that investors and policymakers have to get right. Otherwise, the backlash could grow to a level that could see ESG become a niche investment strategy once more.


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