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ESG Investment: Virtue Signalling at its Best – Irina Slav


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These translations are done via Google Translate
by Irina Slav

Three of the world’s biggest oil companies — BP, TotalEnergies, and Shell — won acreage in Scotland’s biggest offshore wind power tender in January. This should have pleased their ESG shareholders who have been pushing for greater climate-related commitments. But let’s pause for a moment.

ESG is an abbreviation that’s been circulating in the media—and in corporate news- and boardrooms—for a while now, and it has been gathering speed. It seems that every company that has any self-respect has prioritised ESG above everything else, possibly even profits.

ESG stands for environmental, social, and governance: three aspects of corporate behavior that a new generation of investors is seeing as crucial for any company that wants to be attractive. And because this new generation is quite a vocal one, it is making a lot of noise and the noise is causing changes.

Would anyone have expected a year ago that Exxon would ever make a net-zero commitment? Exxon, the biggest public oil company in the world before the listing of Aramco and a major target for oil industry protesters. Exxon, a huge polluter that stubbornly refused to commit to a renewable shift the way its European peers did. That same Exxon announced on January 18 it planned to become a net-zero company by 2050.

That the company’s share price did not dip the way BP’s dipped when it made a similar announcement in 2020 is quite telling and the story it tells is one of a shift in investor priorities. If course, unlike BP, Exxon does not mention in its announcement that it would cut oil production to achieve this net-zero status. In fact, Exxon does not even mention the word oil. The world oil has clearly become too toxic to handle, even by one of the biggest producers of the stuff.

Meanwhile in Europe, ETF providers are shifting their funds to ESG indices and some fund managers are finding this unpalatable. According to an FT report citing industry insiders, some fund selectors are feeling “wrongfooted” by the shift, which apparently sometimes happens without prior warning.

“Fund selectors hate funds being changed without prior warning,”             the senior director of global insights at Broadridge, Chris Chancellor, told the FT. “For [a fund] to change without prior warnings and conversation means [selectors] may have a fund that doesn’t fit with the reasons they added it to the portfolio.

“Change with little warning creates a trust issue,” Chancellor added. “If a change is forced on [a client] at short notice, that doesn’t feel like a partnership and you lose trust that is hard to build in the first place.”

A trust issue in the investment world is the last thing you want to have and yet the momentum that ESG investing has built up seems too powerful to stop it. And yet with positive developments such as Exxon’s net-zero declaration come side-effects such as the trust issue.

Those European fund selectors that resent their funds being cut off from direct investment in, say, Shell, are not alone. They may not be many but there are voices sounding the alarm against overfocusing on environmental considerations—because the E in the ESG abbreviation tends to draw the most attention, what with the climate protests from the last few years, Extinction Rebellion and Brussels politicians detailing a whole energy taxonomy for the green transition.

Consumer goods giant Unilever has lost the plot, with its management prioritising the display of its sustainability credentials over running the business, the founder and manager of Fundsmith, a top-10 shareholder in the consumer products giant, Terry Smith, recently said.

The FT quoted the investor as noting that “Unilever seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.”

GLJ
GLJ

And Unilever is hardly the only one—all the European oil supermajors are prioritising renewable energy over oil and gas and all of them plan to reduce their oil output in the coming years. Demand might disagree but in the ESG world, fundamentals are not that important.

The ESG trend is increasingly beginning to look like a bestseller. Imagine a book — and this happens a lot in the real world, by the way — that is being advertised as the next huge thing after the Bible, the book you absolutely must read if you want your friends and acquaintances to think you’re smart. The book may well be a pretentious, boring and above all unsuccessful attempt at art but if ads tell you it’s the must-read for the year and the decade ahead, many would buy into it. Because who wouldn’t want to look smart, right?

It’s very much the same with ESG even if that trend, unlike bestsellers, has some good reason to exist. It’s right to make businesses more accountable for the effect their operations have on local communities and on the environment. It is also right to hold them accountable for some less than legal governance practices. It’s really a question of overdoing it and overdoing it is what is happening now. Companies are waving their ESG credentials in the air like a virtue-signalling flag.

I recently read an article whose author argued that the E in ESG has become unjustly overemphasised at the expense of the S and the G. Sadly, my memory failed me and I can’t remember what the article or the author was called but that statement stayed with me.

The E is the most fashionable element of the abbreviation. The E gets the most clicks and the most followers on Twitter. And the E, apparently, gets the most money judging by the ETF index shift in Europe and by investment flows. It also seems to be the source of higher costs here and there.

The stampede of investors into EVs, for instance, is perfectly understandable if you follow closely news about government incentives for EV buyers, billions being spent — or at least being planned to be spent — on charging infrastructure and more billions carmakers are pouring into their all-electric model lineups for the future.

But if you also follow metal price news you might start go get confused because pretty much all the news from the metal space these days is about shortages and higher prices. Nickelcobaltrare earthslithium – you name it, it’s in short supply. But instead of looking for ways to find alternative supplies, carmakers are doing something very different: they are demanding ESG credentials from their suppliers.

Per a report by Fastmarkets, automotive companies were requiring that suppliers of critical minerals pass through a vetting process in order to make sure the minerals they supply were mined environmentally, socially and governance-ly responsibly.

What this amounts to is nothing short of a complete overhaul of priorities. And it means higher prices still because a whole vetting process complete with checks and evidence-gathering cannot be free. But ESG investors want their carmakers ESG-aligned, right? And it’s the ESG investors that matter.

Twenty years ago, any startup that said it was doing business in or around the internet got millions of dollars without having to disclose business plans or any boring stuff like that. It didn’t end well. Now, companies that say they are making electric cars get millions even before they have a prototype. Companies that build wind turbines get millions because they build wind turbines and nobody cares about the price of copper or carbon fibre recycling. If it looks like a bubble and walks like a bubble, would it pop like a bubble?

 



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