“There is no more neutrality in the world, you either have to be part of the solution or you’re going to be part of the problem — there ain’t no middle ground.” — Eldridge Cleaver
Increasingly, I am seeing more people being openly critical of the powers that be about the slow, incremental response to societal and environmental challenges. It seems that many are following Howard Beale’s yawp from the 1976 Sidney Lumet’s movie Network, “I’m Mad As Hell and I’m Not Gonna Take This Anymore!”
When TBLI launched 25 years ago with a mission to change the financial system so it works for multiple stakeholders, we faced tremendous pushback from asset owners, managers, service providers, rating agencies, etc. Many thought it was smooth sailing in Europe. The opposite was, and is, true.
I remember being asked to speak to the Dutch insurance industry about climate risk. I said, “The Netherlands is below sea level. Sea levels are going to rise. I would be concerned.” The answer I got from the audience revealed the low level of awareness. “It’s not a problem for us if sea level rises. We don’t cover salt water damage,” responded an insurance executive. I replied, “That is true, but you give mortgages. If 200,000 homes are underwater, you have a big financial disaster on your hands.”
We have come a long way. Based upon the money flows, ESG has been a resounding success: “ESG assets may hit $53 trillion by 2025, a third of global AUM,” reports Bloomberg Intelligence. Additionally, there never has been as much attention on ESG from the media, business schools, policy-makers, impact network associations, conferences, and press releases as we see now. We won! Or did we?
Unfortunately the money flows have offered a false sense of success. The truth is, we have failed miserably.
Assorted social Investment forums claim 40 trillion dollars committed to ESG in one shape or form. Are these figures accurate? Is so much money really going into ESG, or is the definition, are the parameters, incorrect?
I believe ESG has become synonymous with holding a membership card to a fitness club but never going. How much of this money has really addressed the challenges that ESG was intended to address? The environmental and societal challenges the world faces are staggering; here is a short list:
- Climate Change Destruction
- Biodiversity loss
- Water Shortage
- Food shortage
- Health Crisis (i.e. Diabetes)
- Income Inequality (i.e. Living Wage)
- Threat of War
All of the above have grown significantly despite the money flows that were intended to reverse the trend.
What exactly is ESG?
The head of a family office in Singapore asked me, “Robert, we don’t understand how the most toxic companies score so well on ESG Sustainability Indexes. BP & Shell are carbon intensive and climate change criminals. Unilever sells semi-toxic cosmetics and processed food. Pepsico promulgates diabetes from snacks and sugar water.”
Unfortunately, the money flows have offered a false sense of success. The truth is, we have failed miserably. We need Investing 2.0 that is far more regenerative in nature.
I explained that the methodology used for ESG assessment is focused less on what the company does but, rather, how it reports.
Institutional investors, like pension funds, claim ESG alignment because they are engaging with companies through intermediaries. “Engagement” is very popular because, in reality, nothing has to change. Pension funds maintain their positions and an intermediary speaks to the companies about their desire for behavioural change. Are they really influencing the behaviour of companies to address, for example, climate risk? Not really. If you pull up the kimono, nothing substantial is there. They are often empty gestures, because that is where the money is flowing. They don’t want to miss the party — to be seen as part of the club.
ESG has become synonymous with holding a membership card to a fitness club but never going.
Some of those that benefit from ESG are:
- Fund managers
- Institutional investor box tickers
- Aspiring “club” members
- Service providers
Who doesn’t benefit: Society and the Environment
Alongside ESG’s failure to address societal and environmental challenges, the wealth management industry has missed the boat in embracing “regenerative” or “investing 2.0”. Most of the major private banks declare the importance of sustainable investment. Yet, for all its importance, why is it that not one major private bank dominates the space? The main reason is that none of these institutions want to be seen as “the impact bank”. Yet, they also don’t want to be not seen as the impact bank. Image is everything; the commitment, however, is not there.
The methodology used for ESG assessment is focused less on what the company does but, rather, how it reports.
The market is clearly interested in ESG, but the way ESG is done now is just a death march in the wrong direction, but slower. Going forward, investment needs to be regenerative in nature. Fortunately, many asset owners are starting to realize this fatal flaw and are demanding investment that is regenerative in nature or, at the very least, far less harmful. An example is the recent launch of Net Zero Asset Managers, an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050. I hope this isn’t another empty promise wrapped in a shiny press release. We have had enough of that. Let’s stop the ribbon cutting and grab the shovel, do the work, and get mad as hell.