To wean itself off Russian energy and transition to clean energy, Europe needs far more coal. Companies that increased coal usage to keep the lights on were punished on ESG metrics, but it was needed and profitable – coal stocks were rewarded massively with share price rises.
Does this make ESG flexible, inflexible or just subjectively ambiguous? We must rethink what ESG means and re-evaluate how we prioritise the competing environmental, social and governance forces. We should recognise ESG is difficult and there are major trade-offs; it’s not always win/win.
Elon Musk recently questioned the governance element of ESG in an angry tweet claiming “ESG is a scam” after Tesla was dumped from ESG indexes for racial discrimination and poor working conditions. He contrasted the oil company Exxon as supposedly a top-10 ESG company. ESG is not always clear cut.
Musk highlighted the role of “phony social justice warriors” in weaponising ESG. This brings us to the culture wars where ESG is the next American political battlefront.
Former US vice-president Mike Pence came out swinging in a recent Wall Street Journal opinion piece, claiming the “pernicious strategy” of ESG from the “woke left” means Republicans need to “work to end the use of ESG principles nationwide”.
This political backlash is gaining momentum and Republican-controlled states have introduced bills to undermine ESG investing. In Australia, time will tell if ESG becomes a pawn in the culture wars.
Investment decisions shouldn’t be political. ESG investing has arisen out of investor demand. Pence is entitled to his views, but so too are mainstream ESG investors.
Problems associated with ESG include its lack of rigour, exaggerated language, inconsistent data and greenwashing (ESG marketing spin).
John Gilligan of Big Issue Invest sums it up well: “The idea of measuring ESG is like trying to find a measurement for your favourite child.” It’s fraught with risk.
Regulators are working at breakneck speed to develop rigorous and measurable ESG standards to ensure industry-wide accountability. This will be crucial for the success of ESG investing.
In Europe, the UK’s FCA is developing a sustainable classification and labelling system and the EU is using Sustainable Finance Disclosures Regulation to protect consumers. The SEC in the US is proposing enhanced and standardised ESG disclosures. In Australia, ASIC has issued new greenwashing guidance.
Importantly, the International Sustainability Standards Board is working on global financial reporting standards for ESG, similar to the global accounting standards.
Despite these significant challenges and its current shortcomings, ESG investing is here to stay. In these challenging markets, SMSF investors should welcome heightened scrutiny of ESG but the confected outrage is on the wrong side of history.