In 2021, almost two-thirds of respondents said they considered environmental, social and governance (ESG) factors when investing. In 2022, that number was 60%, and this year it’s 53%, according to the annual ESG Attitudes Survey from the Association of Investment Companies. Asked why they were over ESG, the top reason given was that performance was more important.
Next up: greenwashing. In 2021, only 48% of investors said they were “not convinced by ESG claims from funds.” That number is now up to 63%. The same investors look like they are putting their money where their mouths are: The most recent data from the Investment Association showed a third month of outflows from the Responsible Investments category — a record £448 million ($547 million) in August.
Anyone in doubt about the market’s attitude toward ESG investing today need only look at the share price of Impax Asset Management Group Plc. It rose 33 times from late 2015 to late 2021 — and is down 70% since. Bubble, bubble crash.
The exodus makes complete sense. That’s partly about performance. It’s a lot easier to feel pro-ESG when it’s making you a big pile of money, as it was three years ago. It’s 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% year-to-date and 12% over three years (low interest rates don’t 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% over the last three years. In the UK, shares of Shell Plc hit an all time high this week.
But it’s not just about performance. It’s 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 will keep pouring in: Right now only 11 members of NATO spend 2% of GDP on defense. That will 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 can 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. But in the longer-term it also involves an awful lot of digging, something that now makes mining full-on ESG.
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A note just out from asset manager Janus Henderson titled “Doing Good Feeling Good” explains: Many investors, says portfolio manager Tal Lomnitzer, have been focused on investing in firms with high ESG ratings and low emissions. But 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 and steel and rare earths.” Yet without these — and the mess their extraction causes — “there can be no low carbon future.”
One example from the International Energy Agency: At the moment, total annual global nickel production is around 2.8 million tonnes; by 2040, the electric-vehicle and battery-storage sector alone will require 3.3 million tonnes. Green is grubby. 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’s Jeremy Grantham put it on our “Merryn Talks Money” podcast last week, “Sorry purists.”
You can take this pragmatic approach to ESG as far you like. Take tobacco companies. It would obviously be better if they never existed and if they disappeared faster. But 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. And think of the amount of tax they pour into our treasuries — cash that on 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’s definitely not enough of one, but you get the point — it’s hard to find absolutes.
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The idea of ESG has been changing since the day it was just a twinkle in a marketing man’s eye. But 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 Alex Edmans, a professor of finance at London Business School points out, “ESG is both extremely important and nothing special.” It’s 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 last decade, and we are back to understanding that good companies have always thought about this stuff — just without the relentless greenwashing and grandstanding. - Bloomberg Opinion:
