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ESG Focus: Call To End ESG

ESG Focus | Aug 15 2022

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

ESG Focus: Call To End ESG

Cracks are starting to emerge in the ESG narrative as elite global financial interests battle for supremacy, but what does this mean for markets?

The Economist calls for an end to ESG
-What this means for markets
-Competition alive and well – for now
-Welcome to the real world, ESG

By Sarah Mills

I have a subscription to The Economist because I view it as a bellwether of the mood of big capital.

After all, according to the more democratic Wikipedia, it is majority owned by the Agnellis’ family company Exor, followed by Rothschild (with a roughly 21% stake), Cadbury, Schroder and Layton’s.

Its board reads as one of the best Who’s Whos among the world’s publications and includes Rupert Pennant-Rea, Lady Lynn Forester de Rothschild, Sir Simon Robertson, Zanny Minton Beddoes, Lady Suzanne Heywood, Brent Hoberman, David Bell, Baroness Jowell, John Elkann, Alex Karp and Chris Stibbs.

For the past few years, The Economist has been broadly supportive of the ESG narrative, if occasionally narky about stakeholder capitalism.

So you can imagine this reporter’s surprise when The Economist’s leader (the part of the publication that represents the views of the owners) called for the end of ESG. 

The Economist's leader pulled no punches. In an all-out assault, headlines and sub-heads included:

“Three letters that won’t save the planet”

“ESG should be boiled down to one simple measure: emissions”

“A broken system needs urgent repairs”

“The ESG approach to investment is broken. It needs to be streamlined and stripped of its sanctimoniousness.”

The leader was followed by several such plain-speaking articles in the same week, and a podcast in which Blackrock’s former co-Chief Sustainability Officer Tariq Fancy and Lisa Woll, CEO of the Forum of Sustainable and Responsible Investment, explore whether the industry can survive.

Notably, this call was not echoed in other global publications. 

The Rockefeller camp still appears to be on board, although its focus has always been on energy and its approach to the "S" has revolved more around the benefits of renewables to emerging economies than stakeholder capitalism.

Tech interests are also still aligned, although Elon Musk decried ESG as a “scam” after Tesla was dropped from the S&P 500 ESG index (while Exxon remained) as rivals escalated his character assassination in the global media (he has a point with Exxon). 

At last glance, S&P also appears to be on board, as is the Bloomberg camp. 

Bezos’s Washington Post has rightly been critical of the lack of evidence-based measurement, and is also a strong critic of stakeholder capitalism (as has been The Economist) but has proved marginally supportive of the overall ESG narrative.

A Quick Summary Of The Economist’s Argument

Basically, The Economist argues that ESG is a mess and causing more problems than it’s worth. No surprises there.

It says America’s politicians blame a “climate cartel” for soaring petrol prices; greenwashing is rife; tracking metrics is nigh on impossible and there are loopholes big enough to drive a cargo ship through; whistleblowers are being heard (oh dear); and major companies are falling victim to regulatory problems and may not be ready for an impending wave of litigation. 

But perhaps the most valid criticism of ESG is its inherent contradictions. The green transition alone requires a great rape of the environment.

It requires the mining of “dirty” metals such as lithium for batteries – not to mention the steel and copper and required.

This represents a clear litigation threat, not to mention expense, for such industries, as well as for nuclear and gas.

Hence, The Economist goes so far as to throw not only the S and the G out the window, but the environment as well – in other words, business as usual.

In The Economist’s less than brave new world, only the E is left standing, lopped from the "environment" trunk, and it stands for Emissions.

The Economist is calling to end ESG and replace it with the green transition only, noting this is simpler to report on and track.

Forget biodiversity, water scarcity, nuclear pollution, broader environmental pollution, and all the other various maladies that accompany the transition, let alone social dislocation.

Winners And Losers

If adopted, this would have major implications for global financial markets.

The most obvious impact is the flow (or acceleration) of capital from "S" and "G" and non-emissions environmental investments to emissions-oriented investments.

At a glance, the major beneficiaries of such a shift would be carbon offset markets, nuclear energy, EV-related metals and minerals, and renewables.

And the losers?

Fossil fuels obviously. 

If the environmental pressure and associated legal action is removed from nuclear energy and the focus switched solely to emissions, then that would favour nuclear energy over gas, which were both only recently included in the European taxonomy.

Occupational health and safety, general health and social imperatives would fall by the wayside, and governance responsibility would be narrowed to adherence to transition commitments – at least for the purposes of attracting capital for those willing to take the risk (particularly on OH&S).

This could also affect investments related to occupational health and safety, or ESG scores of funds weighted to such metrics. It would also likely affect investment in any health plays that do not immediately reduce the demand for hospital beds. 

It might affect certain technology investments oriented to tracking and reporting on modern slavery, favouring those focusing on emissions.

It could also change capital expenditure allocations of corporations. For example, miners may be able to reduce or divert expenditure from metrics such as water to emissions, or to bump up capital expenditure for decarbonisation.

The distancing from the S could also have ramifications for labour and recruitment. At face value, gender and diversity promotion are likely to be less valuable to corporations in attracting capital.

Even pressing issues such as single-use plastics and recycling are likely to take a back seat.

As for biodiversity, well it never got off the ground.

The Economist's call comes as the US Securities Exchange Commission prepares to mandate green reporting this half.

Reducing the ESG focus to emissions would allow litigators to sharpen their sights and buttress their cases against emissions transgressors, or those funds weighting their portfolios with softer, less trackable "S" scores.

Why The Change Of Heart

The only issue with all of the above is that none of the charges are new. 

Columnists such as ourselves and others across mainstream media have been pointing out these problems from day one.

And most investors have been using their own commonsense and nous to navigate the ESG minefield.

So what’s changed?

Old-school journalists were always advised to follow the money. 

And it is usually finds a target.

The Rothschild family for one has big uranium holdings and Stephen Vaughan, vice chair of Energy & Power at Rothschild & Co has been lobbying heavily for political support for nuclear energy in global taxonomies, with great success.

So yes, money is at play, but the Rothschild’s interests would be broad based, and other reasons include: competition; western politics; supply chain issues; economics; and geopolitics.

Competition Playing Out

But back to the money trail.

That no other publications have yet proved as strident as The Economist in calling for an end to ESG suggests competition is alive and well.

It is a sign that winners and losers may already be starting to emerge from the transition and that the losers are crying foul.

Or that those whose interests aligned solidly with nuclear energy are ready to push their agenda, believing the time is ripe.

Competition can be a good thing, and a dangerous thing, as the mammoths knock heads.

That the most strident criticism is emerging from the power bastions of Europe, as opposed to the United States, is also interesting.

The position of global publications going forward will test this theory.

Welcome To The Real World – Supply Chain Havoc

Then there is the most obvious, practical reason for The Economist’s call: difficulty of execution.

To my mind, this is a clear example of the rubber hitting the road as ESG theory meets ESG reality.

As a writer on ESG, I could not but be impressed with the scope, ambition, architecture and detail of the ESG blueprint. 

But as a strategist, I was always skeptical.

The cardinal rule for strategy is KISS – keep it simple stupid.

A strategy needs to be simple, elegant and targeted to maximise ease of execution – everything that ESG is not.

Covid, politics, geopolitics and economics has made the ESG blueprint almost impossible to execute swiftly and efficiently. 

The supply chain havoc caused by covid is flowing through to wage inflation and labour shortages.

For example, the global demand for Integrated Logistics Support personnel cannot be met.

Not only that, the "S" in ESG substantially raises the strategic and logistical qualifications of staff.

Previously, the main task of your average ILS person was obtaining the best product at the cheapest price and ensuring reliable delivery.

The mandate of removing modern slavery in supply chains, combined with tracking emissions in supply chains is a task of such complexity to be well outside the training and natural capability of the standard ILS workforce.  

And covid-induced labour shortages are being exacerbated by extra demand from green industries, which could in turn impede the pace of the green transition.

No doubt, assuming big capital remains willing, the ESG plane should eventually land, but it was always going to be a rough flight.

Economics And Geopolitics

The other obvious factor is the economy, particularly inflation, which links to the covid-related supply-chain issues above and the affect of the Ukraine War on energy prices.

Demand for green commodities is also exacerbating covid-induced inflation, so one assumes releasing pressure wherever possible can't hurt.

And if China is any example, focusing on the "S" can also have affect not just wages growth, but economic growth.

FNArena recently reported, China itself was forced to backpedal on its Prosperity Plan (the S in ESG) in favour of “stability” heading into its party elections.

The introduction of the Prosperity Plan combined with covid lockdowns (the two appear to be related) crunched China’s GDP, creating a situation in which the West faced rising inflation combined with the spectre of slowing global growth – stagflation. (This is a simplified version of events for the purposes of argument).

While it is difficult to determine the degree to which lockdowns versus "prosperity" wealth transfers were responsible for the slowdown, not to mention other economic problems in the construction sector, and the totalitarian and politically motivated execution of the policy (theoretically, the "S" should result in a redistribution of money back into the economy to fire green business opportunities), combined the four packed a punch.

As the West faces its own economic challenges, it may be that it too is backpedalling on social imperatives, not only to foster growth, but to improve its hand in the race to a global transition.

On the one hand, if the West proceeds with the S in ESG, it has a natural advantage over China in the green transition. 

On the other, China has used covid to deepen the West’s supply chain dependence; and has not been backward in demonstrating the fact.

This would mean that for the West to continue alone with social imperatives may disadvantage it; and its threat to punish China through its supply chains prove idle if unexecutable.

This would leave the world in an all-out race to the finish line to meet the green transition and gain supremacy heading into the fourth industrial revolution.

And this may be the position in which we now find ourselves.

Cracks Showing In Western Politics

Then there is western politics to consider.

There have been signs that the control that big capital has held over the ever-thinning illusion of western democracy through the two-party system is starting to crack.

Much of this can be sheeted back to covid over-reach.

For example, in France, in a much globally under-reported but significant event, the French Parliament overturned President Emmanuel Macron’s bill for a covid vaccination passport.

For the first time in a very long time, France’s far right and far left joined forces to defeat the bill. The packed parliament erupted in cheering and applause. 

Also, in France’s recent election, Macron lost his majority and France’s left wing parties formed a block after decades of separation.

Similar political alliances and breaks are forming around the world. 

In Australia’s recent elections, a record number of independents won seats, in a bid to take the political narrative back to the centre, battle corruption and reclaim control over the environment from mining and developer interests. 

Boris Johnson resigned in Britain, leaving his party in tatters. 

In the US, where control of the two-party system really matters to big capital, several independents recently announced they will run for office. 

This is notable in that rarely have independents made a dent in the US political system. As of July, there were only two independents in Congress.

Part of this reflects the shift of capital to climate-supportive policies and parties, and the reaction.

But the forming of left and right-wing alliances, as witnessed in the French parliament, is a sign of a deeper change in sentiment, which could account for The Economist’s unceremonious dumping of the “S” category (the S is probably the least popular category among big capital generally and is certainly harder to monitor).

Big capital may prefer to focus on domestic political imprimaturs for now.

Only Those Who Know, Know

But all this is merely speculation.

All we know at this stage, is that a gambit has been made in the ESG chess game.

The gambit suggests that, of all ESG investments, emissions are the safest for now and funds may accelerate into the sector.

It is also unlikely that ESG is dead, although investors will keep a keen ear to the narrative.

S&P Global stated that while China had backtracked on its Prosperity Plan, the policy remains intact.

This is likely to be the case with ESG. Even if big capital backtracks to focus on emissions only, the fundamental principles of ESG are likely to remain intact.

Quietly most serious investors will be investing in companies with a strong emissions track record and good governance (a Bloomberg survey recently showed that governance was the prime ESG target for traders). Good social scores would be a bonus. 

So it may be that a too-cavalier attitude to the E, the S and the G, could prove expensive when it all comes out in the wash.

Also, the realignment of ESG metrics among many corporations is well progressed and the prospect of strategic gains aren't likely to be dropped mid-flight.

Until then, the investment mantra is emissions, emissions, emissions!

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

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