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Opinion | ESG investing: a waste of climate finance?


“Global investors are turning their backs on sustainably focused stock funds as poor performance, scandals and attacks from US Republicans hit enthusiasm for a much-hyped sector that has pulled in trillions of dollars of assets,” the FT report said.

ESG is not so much an investment bubble as a mirage, one so powerful that, by the end of 2022, global ESG assets had exceeded US$30 trillion and were projected to reach more than US$40 trillion by 2030, according to a Bloomberg Intelligence report at the beginning of this year. Withdrawals to date may not look so large against that, but the tide of opinion has seemingly turned.

While other countries such as China have approached the problem of global warming with practical solutions like mass producing relatively cheap solar panels for export to the rest of the world and others have sought institutional solutions, major Western economies have seemed to place a high priority on ESG – a purely financial construct.
Employees work next to solar panels at an integrated power station in Yancheng, Jiangsu province, on October 14, 2020. Photo: AFP

It was flawed right from the start. ESG is too diffuse, allowing for myriad interpretations of what the term means and enabling countless firms and other entities to claim compliance with vaguely defined standards.

ESG was a well-meaning concept when then-United Nations secretary general Kofi Annan promoted it 20 years ago when he wrote a personal letter to the CEOs of 55 of the world’s leading financial institutions asking them to behave like good corporate citizens.

All they had to do was promise to respect the environment, keep in mind their (undefined) social obligations and practise good corporate governance in running their enterprises. That would earn them the approval, it was suggested, not only of the UN but of corporate shareholders and perhaps even stock markets.

This, in turn, would generally burnish the image of capitalism while aiding environmental sustainability. What was there not to like about a system that appeared to promise good public relations in return for minimal commitments and outlays?

01:40

‘Climate time bomb ticking’: UN chief says carbon emissions must be urgently cut

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Such rosy views were to prove egregiously shortsighted. For one thing, they overlooked the need for much more direct and urgent approaches to fast-escalating global warming – the need to replace coal- and oil-fired power generation with renewables or nuclear energy, and to finance the vast transition costs involved.

Getting the corporate sector to promise good behaviour across a range of goals that include sustainability and the environment among others is not the same as directing investment into well-defined climate goals like reducing greenhouse gas emissions. The energies of the financial sector would have been better directed towards the latter.

Instead, investment in ESG stocks and funds – aided by the swing towards exchange-traded funds – has allowed it to dominate the sustainability universe at the expense of other approaches. Until now, that is.

Even before the recent withdrawal from equity funds, ESG had become so associated with “woke” capitalism that the CEO of investment leviathan Black Rock, Larry Fink, refused to use the term, saying it had become too “politicised” – although he continues to support sustainable investment principles.

Protesters hold placards during a rally in the Philippines’ capital Manila, on June 11, calling on G7 leaders to deliver climate finance to developing countries. Photo: AFP
Criticism of ESG has reached a crescendo among those who claim it is an affront to the kind of free-market capitalism espoused by the likes of Milton Friedman, and that it puts companies at a competitive disadvantage compared with others, a notion that resonates strongly as geoeconomic tensions rise.
But a more telling indictment is that ESG is too complicated to monitor effectively. Some suggest that greenwashing is effectively licensed by this complexity.

The money that has flowed into ESG funds from institutional and individual investors, and which has chiefly benefited the fund management industry, might have been better directed to other forms of sustainable investment, of which there are many.

The key question now is whether growing disillusionment with ESG will sabotage already lukewarm interest in climate investing, leaving governments with a growing need to foot the bill, estimated at anything from US$100 trillion to US$200 trillion.

The bottom line is that market-based solutions are just not going to work without official intervention to decide where the need for spending is, how much is required and in what form investments should be structured. Fortunately, multilateral development banks have taken a step down this road by agreeing to coordinate their efforts on climate change.

But this does not go far enough. They need to be given more capital and authority to identify projects and fund them in the initial stages before packaging and securitising them for sale to the market.

That way, maybe we can avoid ill-conceived efforts like ESG that threaten to waste trillions of dollars more than they have done already. One way or another, this is going to hit the pockets of investors and/or taxpayers and that should make them sit up and take notice.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs



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