ESG - Breakdown or Breakthrough

Now is ESG’s moment, or is it? For the past 25 years, TBLI has worked to educate asset owners and managers regarding ESG and impact investing. Based upon the money flows, one would say it has been a resounding success if one only looks at the numbers. “ESG assets may hit $53 trillion by 2025, a third of global AUM,” according to Bloomberg Intelligence February 23, 2021.

The assorted Social Investment Forum’s claim that 40 Trillion dollars are already committed to ESG, in one shape or form. But are these figures accurate?

Unfortunately, if we look at the impact of all these asset flows, we really have to start questioning the claims. Firstly, are the numbers correct that 40 trillion dollars have already been invested in ESG from institutional and retail investors? And secondly relates to the issue of the definition - perhaps the figures are accurate, but has any of this money really addressed the challenges that they were intended to help, fix or address?

If one looks at the environmental and social challenges the world faces, still after all the trillions going into ESG, one can only admit, ESG investing to-date has been a failure. The ongoing issues below highlight this, as all of them have grown significantly despite the money flows that were intended to reverse the trend.

• Climate Change Destruction
• Biodiversity loss
• Water Shortage
• Food shortage
• Health Crisis (Diabetes)
• Income Inequality (Living Wage)
• Pollution
• Threat of War

I was asked by a family office in Singapore to stop by to discuss ESG and Impact Investing, as the family was transitioning from intensive fossils fuels to sustainability. The head of the Family Office said, “Robert. We don’t understand how the most toxic companies score so well on ESG Sustainability Indexes. For example, BP & Shell - carbon-intensive and damaging the climate, Unilever - semi-toxic cosmetics and processed food, and Pepsico – causing diabetes from snacks and sugar water.” I had to explain that the methodology used for ESG assessment is not what the company does but how it reports.

If one looks at institutional investors like pension funds, they began claiming ESG alignment because they engaged with the companies through intermediaries. The engagement was very popular as nothing had to change; the pension funds maintained their positions and an intermediary spoke to the companies that the asset owner wanted to see behavioural change. Were they really changing the behaviour of the companies to address climate risk? Not really.

To date, the ones who have benefitted from ESG and Impact Investing are Fund managers (fees), Institutional Investor box tickers, Aspirational Club Members, Service Providers, and Advisors. Unfortunately, so far, society and the environment have not benefitted.

Why has ESG become so popular?
The reason for ESG’s rapid’s growth is because it describes a form of investing that has multiple beneficiaries, and not only for the investor. It looks at all risk factors; social, environmental (climate change), governance as well as financial. If a company has extraordinary social performance, they often spend less on hiring the best and the brightest, and they retain them longer, as most employees are looking for some purpose. Additionally, companies with excellent environmental performance often waste less, pay fewer fines, use fewer raw materials and energy. All of this leads to higher returns and lower risk.

But the really big drivers of ESG and Impact investing are at the macro level of resource depletion, driven by emerging market economic growth. At 8 percent annual growth, China would reach US consumption levels in 2030, translating into China consuming c60 million barrels per day. The present consumption is about 84 million worldwide.

This massive commodity requirement is even worse if we look at grain, iron ore, paper, coal, steel, and meat. If we then add India to the mix, and then the other 3 billion in emerging markets and the developed world, one can see that linear growth is not possible at this level of inefficient use of resources or present business model. We won’t have enough.

"The Western economic model, the fossil fuel-based, automobile-centered, throwaway economy, will not work for China," says Lester Brown of Earth Policy Institute. So, the only way to continue the growth is perhaps conflict for resources, which is not a good long-term option.

The real opportunity for the financial sector is a massive drive for resource effectiveness or efficiency, which is what sustainability is about. Doing more with less also translates into more profitability.

When a wealth manager engages their clients on ESG investments, that conversation can be much more engaging than traditional investing. Impact Investing instils passion and excitement. If one looks at the anticipated transfer of wealth – some US$30 trillion- in the coming 20-30 years to Gen Z and Millenials, this is a massive opportunity. Gen Z values are not only financial. They are more willing to align their values with their investments.

As information, education, and infrastructure for ESG Investments increases, the market will grow even faster. The market is clearly there, but the way ESG is done now is just a death march in the wrong direction but slower. Fortunately, many asset owners are realising this and demanding investment that is regenerative in nature or far less harmful. This message was clearly made with the announcement of the launch of Net Zero Asset Managers The Net Zero Asset Managers initiative is an international group of asset managers committed to supporting the goal of net-zero greenhouse gas emissions by 2050. Let’s hope this is not another aspirational press release that sounds good but never delivers.

About Robert Rubinstein
Robert Rubinstein is CEO and founder of TBLI Group. For 25 years TBLI has advised investors seeking to incorporate Environmental, Social, and Governance principles into their portfolios, with the goal of making make a positive, measurable social and environmental impact alongside a financial return.

TBLI work with their clients to identify outstanding businesses that generate sustainable shareholder value and will in the long run outperform their peers. TBLI clients leverage their large network of ESG-focused businesses to complete a virtuous circle of investment that continues and accelerates the world’s inexorable shift toward sustainable business and a sustainable society. Triple Bottom Line Investments are investments that deliver financial as well as environmental and social value. TBLI Group has helped hundreds of asset owners and managers to achieve triple bottom line success. Our mission is to provide multiple returns for your investments. For 25 years has aided asset owners and managers in integrating ESG and Impact in their portfolios. Having completed nearly 500 projects and influencing over 50 Trillion dollars in Assets and helped direct nearly 1.3 trillion in investments.

This article was originally part of our Wealth Tech Views ESG Report. Click here to access the full report.