Green washing and other ESG phrases that do nought for your bottom line
In the olden days, you would give your hard-earned cash to an asset manager, who would invest it on the global financial markets and update you each quarter on your net-of-fee investment return. The transaction was simple. “Invest this,” you said, to which the asset manager responded: “I will do so”. As we power through the 21st Century the investee-investor relationship has changed.
Just doing what they say you say…
Today, per emerging societal norms, the investment transaction and ensuing investment decision making is far more complex. “Invest this, but stay out of the environmental, social or governance (ESG) ‘no go’ areas, and whatever you do, do not upset the woke,” you say, allegedly. Allegedly because the asset management community, eager to appease the loudest public voices, seems quite happy to put words in investors’ mouths. The truth is that investors are still comfortable with the simple “invest this” instruction whereas asset managers are under pressure to prove their ESG credentials to the world. “I will,” they say. “And furthermore, I will conjure up returns the net-zero way, without coal, gas or oil; I will avoid anything concrete or steel; and include electric auto only!”
The preceding rant was inspired by one of those pesky mid-webinar polls that took place during a recent Critical Conversations debate, hosted by Sanlam Investments. The moderator and four panellists appeared surprised by the online audience not saying what the asset manager believed they would. “Young people are insisting on an agenda change,” said the moderator, offering a blanket definition of members of the Generation Z and Millennial generations. “They do not just go into a supermarket, look at a product and do a calorie count; they want to know more about it”. Apparently, before buying their favourite FMCG brand, members of these generations ask: who made it; how was it made; what were the wages paid; were gas and fossil fuel emissions involved in the production process? Etc. By extension, ESG-conscious investors would do the same when buying shares.
ESG sympathies skew online polling, probably
Yet, when the audience was asked how important it was for their investments to align with their personal values and sustainability goals, 7% indicated “not important, I focus solely on financial returns” and more than half responded “important, but not my top priority”. A second poll asked whether the audience had ever made an investment decision based on a company’s ESG performance, to which 36% responded “no, not at all” and 37% said “no, but I am considering it”. This writer reckons the responses would skew further to the “no not at all” side was it not for the social pressure to project as ‘ESG sympathetic’. Put another way, as much as asset managers push the impact plus return narrative, investors seem quite happy with return only!
Ironically, concepts like return on equity (ROE) and compound annual growth rate (CAGR) are being glossed over in asset managers’ annual reports in favour of countless non-financial / non-investment acronyms and catchphrases. Investors must wade through explainers on active ownership; diversity, equity and inclusion (DEI); ESG; impact investing; just transition; net-zero; stewardship and sustainability in the hope they stumble upon a paragraph or two about the business of active asset management and / or the return that ‘stacks up’ from same.
Over the past few days this writer paged through the Old Mutual Investment Group ‘Tomorrow: Investing for a Future that Matters 2022’ and ‘Transformation Matters 2022’ reports, which also planted the seed for this article’s headline: ‘Greenwashing and other ESG phrases that do nought for your bottom line’. A classic example is the explainer for the phrase ‘green taxonomy’ which is defined as a naming convention or classification system governing what financial instruments can be called ‘green’. Ugh. You know that society is in deep trouble when they begin arguing over what level or shade of ‘good’ some or other investment opportunity delivers.
Yes, gas is part of the energy transition
For listed firms, the Integrated Annual Report is no longer adequate and must be reinforced or replaced by a litany of other reports. One notable example is Standard Bank Group which placates the ESG mob with a sustainability reporting cluster that produces an annual ‘ESG Report’; ‘Report to Society’ and ‘Climate-Related Financial Disclosures’ among others. Although the group deserves praise for its recent tough and unpopular ‘gas is part of the energy transition’ stance it has long since abandoned the ‘return only’ evaluation of big-ticket projects. PS, this writer recently attended a Standard Bank ESG and Sustainability media round table that illustrated the alarming conflict between environmental and social investment objectives and outcomes.
The executives in attendance juxtaposed Africa’s contribution of less than 4% to global greenhouse gas emissions with the 600 million or more Africans who do not have access to reliable and affordable electricity. Their argument is that you cannot address this continental energy shortage if you yank funding from all coal, gas and oil projects. Likewise, you cannot scupper the East Africa Crude Oil Pipeline project over environmental concerns when you weigh up the economic and social upliftment the project will deliver to millions of Ugandans. The 90-minute-long conversation made it clear that delivering on some of the United Nations’ 17 Sustainable Development Goals (SDGs) meant sacrificing others, especially over the short-term.
As the Standard Bank executives explained, ESG matters are complex and often intertwined, while the outcomes of environmental and social tug-of-wars are often unclear. One of the gems from the aforementioned round table was that “banking is a derived industry that supports what the economy presents it with”. The comment was made in the context of South Africa’s power generation infrastructure being 80% coal-fired with much of that infrastructure designed for 20 or 30 years or longer. How, one wonders, do the green everything crowd expect the country’s coal-hungry power plants to continue meeting our electricity needs if the supply of coal is strangled due to lack of new investment?
Please unplug your cars, the grid is failing…
The environment versus social challenge is even more shockingly illustrated in the context of the Californian ‘please unplug your Tesla’ plea. In that bastion of new age ESG thinking, the regulators want to outlaw the sale of petrol and diesel vehicles by 2035 despite the fact that their electricity grid is already battling to satisfy the energy demand from the electric vehicles currently in circulation… You have to love the following NY Times headline, published in September 2022: ‘Amid Heat Wave, California Asks Electric Vehicle Owners to Limit Charging’. In short, you should probably reflect on the preceding paragraphs the next time you join the mob in attacking an allocator of capital for its fossil fuel exposures.
This writer’s parting thought. Environmental and social trade-offs are complex; it is time that you expand your horizons to inform your views on climate change, decarbonisation; ESG; net-zero and other environmental and sustainability catchphrases before slavishly regurgitating the view espoused by the mainstream media. Do so, and you might refrain from bashing the likes of Standards Bank for their limited and dwindling exposure to so-called ‘dirty’ investments, and instead praise them for all the good they are doing on renewables and similar.
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