March 03 2023

Shall We Talk About ESG Investing For a Hot Minute?

Ah ESG…Who would have guessed that Environment, Social and Governance would stir so much controversial passions?

It started with a noble cause, it has now become the most contentious debate on the planet. The initial plan was to refine the notion of socially-responsible investment, by setting measurable criteria. The latter were parted in 3 categories:

  • The way we use our resources, by far the most easily quantifiable
  • Our relationship to people, from the treatment of clients to employees, with mind-raking questions about “gender and diversity”, and
  • How our leaders ethically manage our companies, which was fraught with challenges when you consider that Machiavelli is on the bedtime table of every Western leaders.

The scene was ripe for troubles. The first one pegged fossil-energy reliant companies, economies, and Governments against proponents of energy change. The second opposed progressists against conservatists. The third unveiled the dark side of any corporate affairs, and also human nature to be fair.

The opportunity was too-good-to-be-true for politicians to commingle those themes with political ideals. Soon enough, ESG-investing had come to embody the expression of a specific political doctrine.

Why such noble goals are so unpopular? It is interesting to note that the term ESG was first allegedly coined in 2004 in a report commissioned by the UN, and supported by financial institutions. Is it a coincidence that such foundations are being revisited after banks, institutions, and frankly the post-war world order have been increasingly discredited since the subprime crisis? Is there a reason that the ESG theme is perceived to embody yet-again a rule imposed top down from the haves onto the have-nots? I leave that to your reflection.

ESG for sure was politically-motivated to “nudge” investors into the “right” direction. Its only original sin was that it didn’t emerge from a popular debate and consensus, and that’s precisely why it’s facing a backlash today, with allegations of green-washing, and woke-investing aplenty.

To be fair, ESG filters and analysis have been erratically applied across an extremely complex investment spectrum. We are at the point where guidance is needed to sort out the green-washers before they finish damaging the theme.

ESG is not a goal, it is a means to a goal. ESG should be treated for now the same way that tax is an adjustment to your portfolio strategy, not the main investment theme. ESG factors “may” be “relevant to a risk and return analysis,” depending “on the individual facts and circumstances.”, as per the Harvard Law School Forum on Corporate Governance. There is no point in retiring rich on a planet that has become unliveable, the same way it is non-sensical to imperil your personal wealth. Anyhow, as it remains counter-intuitive for most capitalists to sacrifice higher returns for long-term benefits, some nudging is still needed, and could be best achieved through fiduciary investment advisers.

Either way, the spin on ESG is ripe for change. The goals are an imperative reality, although we might argue about the means to get there: (1) we must act to collectively reduce our carbon footprint and think about energy and lifestyle alternatives on a global scale, (2) a greater mix of genders, cultures, and social background should inform more prosperous decisions to guide our economies, and (3) leadership should be meritocratic and not inherited or grand-fathered.

ESG was a compelling gold rush in asset management. The seducing theme attracted vast troves of capital. Global ESG assets were estimated at $35Tn in 2020 by Global Sustainable Investment Alliance (GSIA). Under increased regulatory scrutiny, the investment industry has already pivoted. Some funds have been struck down of their ESG label – apparently close to 50% of ESG assets in the US over the past 2 years. ESG was a convenient one-size-fits-all, now the theme has matured and needs to be bifurcated into more quantifiable and trustworthy sub-compartments, with funds specifically dedicated to each. For example, “carbon footprint” for Environment, “customer satisfaction” for social, or “leaders KPIs” for Governance.

ESG should quickly evolve to be more granular, easier to understand, and less controversial. Having been pushed from the top down, this needs to be rebuilt from the ground up. The goals are too important to be sacrificed for political or economic profit.


About –

360 Advisory LLC is a Boston-based RIA managing investments, including crypto