Three weeks ago, Stuart Kirk, the (now suspended) head of responsible investing at British bank HSBC, took to the stage at the Financial Times “Moral Money” Summit at the Biltmore hotel in London, and lobbed a metaphorical grenade into the audience.
Nothing could have prepared the climate activists, responsible investing pundits and consultants for Kirk’s missile. “There’s always some nut job telling me about the end of the world,” he began. “What bothers me about this one is the amount of work these people make me do.”
Climate change is not a financial risk to worry about, he said, adding that “unsubstantiated, shrill, apocalyptic warnings are always wrong”.
Kirk then eviscerated the earlier speeches, which were jammed full of apocalyptic warnings of climate collapse, adding: “Who cares if Miami is 6m underwater in 100 years? Amsterdam has been 6m underwater for ages — and that’s a really nice place.”
This was so far off-piste from the usually prosaic “responsible investing” conferences that even HSBC, a bank that froze the accounts of Hong Kong’s pro-democracy activists to appease China, promptly suspended Kirk.
Arguably, though, this was the moment that the environmental, social & governance (ESG) investment movement came of age. The pressure to act, even for the big banks, had become unavoidable.
To those who’d resisted it, Kirk was probably articulating their own resentment; to the activists, Kirk’s unguarded frankness confirmed their suspicions that financiers are simply paying lip service to “doing the right thing”.
But then there’s a lot at stake. The amount of money flowing into funds that espouse their ESG credentials is hitting new highs. In the US, $400bn flowed into ESG funds last year, sharply up from the $303bn of 2020 — outpacing the rest of the market.
And everyone wants a piece of it. Flip open an investment brochure and you’ll see a bewildering array of new ESG funds, swaddled in comforting talk about “making your money matter”.
Unfortunately, as real as the increase in global temperatures is, much of the industry’s response has been about as legitimate as a R6 coin. To get in on it, some money managers have cynically slapped ESG labels on funds that barely qualify.
This was underscored when one of Germany’s top asset managers, DWS (part of Deutsche Bank), was raided by prosecutors last week, and accused of lying about how “green” its funds are.
Prosecutors said there was “sufficient factual evidence” that ESG factors “were not taken into account at all in a large number of investments”, contrary to DWS’s brochures.
This accusation of “greenwashing” — fibbing about your “green” credentials — isn’t the exception. In December, data provider Morningstar purged more than 1,200 funds — worth a combined $1.4-trillion — from its European “sustainable investment” list, after finding their credentials to be less than promised.
Even the US Securities & Exchange Commission has now created a “climate and ESG task force” to crack down on “ESG-related misconduct”.
This represents the new front in investment deception, and it raises the inevitable question: has ESG been hijacked by marketing departments — including here in SA?
Marketing gimmicks
“In SA, ESG has largely been a PR-led marketing exercise by many firms. Not everyone is doing this, of course, but many of the [claims by] asset managers lack substance,” Fatima Vawda, founder of 27four Investment Managers, tells the FM.
In April, 27four released its inaugural ESG Asset Manager Survey in SA, to which 53 asset managers — overseeing more than R5-trillion — responded.
“While there are areas of excellence, it is concerning that there are also areas where several asset managers make claims that cannot be substantiated or are contradicted elsewhere,” it found.
Some managers excelled: Aeon Investment Management, Ninety One and Old Mutual came out tops. But for some others, there were so many contradictions it was hard not to see it as a public relations gambit.
For example, 27four’s survey found that while all managers have a “responsible investment policy”, only 32 of the 53 make it publicly available. Yet most still say they abide by the code for responsible investment (Crisa), which says “institutional investors should be transparent about the content of their policies”.
More astoundingly, fewer than half (25 of 53) of the asset managers actually measure the ESG performance of their holdings. And 16 of the 53 answered “not applicable” when asked to describe how their ESG implementation had led to real-world changes.
As 27four puts it: “This is quite astounding given the claims being made about responsible investment.”
Unfortunately, this has given ammunition to sceptics, who believe many asset managers are merely paying lip service to ESG. And there is nobody more sceptical than Tracey Davies, a lawyer and founder of nonprofit shareholder activist organisation Just Share.
“The gap between what almost every asset manager says they’re doing on ESG, and what they’re actually doing, is huge,” she tells the FM. “They claim they’re influencing companies to behave better, but there is vanishingly little evidence of real-world impact. Their main driver of decision-making remains: how quickly can we get the highest return possible?”
But, says Davies, asset managers get away with it because there are no rules specifying how ESG must be integrated into investment decisions, which means there’s no basis to hold anyone accountable. “So, it’s no surprise that we’re not seeing any real-world change, despite all these nice-sounding ESG policies,” she says.
Aeon CIO Asief Mohamed is only marginally more complimentary about his profession. He says asset managers should have priced in ESG risks from the start — but many didn’t bother to do so.
“Five years ago, we met Discovery and asked them a whole range of ESG-type questions. And they told us that none of the other asset managers do this. Today, many managers likely only do it because it’s fashionable, and probably reluctantly,” he says.
But, he adds, it’s not just asset managers; companies have hopped on the bandwagon just as hastily.
“A number of years ago, I asked Pick n Pay chair Gareth Ackerman what he was doing to broaden his supply chain, and he referred me to someone else. Today, ESG and what they’re doing to broaden their suppliers, is one of the first slides in any of his presentations,” he says.
Safety in obscurity
Part of the problem is that because ESG is such a sprawling canvas, anything goes. Anyone can claim to be “ESG compliant” before going home and firing up the coal-guzzling smelter they keep in their backyard.
As the Financial Times put it last month, ESG is “an unholy mess of subjective assessments based on patchy arbitrary data that allows anyone to say they are ESG compliant”.
Stitching together three broad concepts only gives it scope to become “more waffly”, the newspaper said.
Neville Chester, CIO at Coronation, says while people want a simple “ESG ranking”, the world isn’t so simple.
“Often, the ‘E’ is in conflict with the ‘S’,” he says. “For example, a large mining company might produce large amounts of CO2. So you say, let’s shut it down — which is an easy win for the ‘E’ side of it, but then what happens to the workers and communities that rely on it?”
Equally, technology stocks such as Facebook (Meta), and Google are considered “green”, yet their governance is a mess, amid accusations they use their platforms to spy on their customers.
Says Chester: “It’s ridiculous trying to get to one ‘ESG score’, and while the index funds obviously want this, so they can put money into ‘green investments’, it’s meaningless. There is no consistency of data, and often this is because the companies themselves report differently.”
As a result, Coronation — like many other institutions — takes a nuanced approach that differs from company to company. Interestingly, Coronation doesn’t exclude any company from its investment universe, including coal companies such as Thungela, or polluters such as Sasol.
“We’ll only exclude a company if, say, it’s a polluter with no desire to remediate, or a company with terrible governance with no plan to fix this,” says Chester. “Our approach is, if we believe the company can deliver significant returns but needs guidance to change, we’ll engage with them to try to fix it.”
This is an approach gaining ground globally, says MSCI, the New York-based research company that operates stock exchange indices. MSCI says divesting from coal companies “might seem the path of least resistance, but [does] little to directly reduce real-world emissions”.
Instead, investors are looking to “engage where they can exert leverage, divest where they can’t, [or] insert themselves into policy discussions”.
This is also the approach favoured by Ninety One.
“The only companies we exclude from our universe are those dealing in arms and ammunition,” says Ninety One’s head of sustainability, Nazmeera Moola. “To simply exclude a company because it’s a carbon emitter won’t help anyone. What we want to do is engage with that company, so we can influence their behaviour and have a real-world impact.”
Ideally, she says, you need to look at a company’s specific ESG risks, and integrate these into the financial models. “This is hard, and labour-intensive. But a blanket exclusion won’t help drive real-world change.”
Davies disagrees. She says asset managers argue that they need to own shares in firms like Thungela to push for change. “But then they don’t actually do the pushing. There is plenty of ‘engagement’ behind closed doors, some of which leads to better disclosure, but very little to show in terms of real-world sustainability outcomes,” she says.
In particular, she accuses Coronation of hypocrisy for saying it will direct capital away from companies that aren’t part of the transition to a low-carbon economy. “But as soon as the coal price takes off, it buys up a huge stake in Thungela, which proudly touts its belief that coal has a huge role to play in our future energy mix,” she says.
Chester disputes this. He argues that Coronation wrote to Thungela in recent weeks, putting it on notice that instead of investing in new coal mines, it should return that capital to shareholders. And it wrote to Sasol, demanding to know details of its plans to reduce greenhouse gases.
“[Davies] clearly has not read our sustainability report correctly. We were against the Anglo American unbundling of Thungela as a means to address ESG — we didn’t say we wouldn’t invest in it,” he says.
But Davies doesn’t buy it — and says asset managers routinely lap up the greenwashing of companies such as Sasol.
“Sasol emits more CO2 than most European countries, but it gets away with smart PR campaigns that make it sound as if it really cares about sustainability, while making no significant changes,” she says.
In 2020, Sasol’s Secunda plant was named the world’s biggest single-site emitter of greenhouse gases — ahead of 100 entire countries. And it was ranked 69th-worst air polluter globally by the University of Massachusetts Amherst.
Yet the company has failed to achieve its own emissions targets for the past three years. Despite that, at this year’s AGM, just 3.3% of shareholders voted against endorsing Sasol’s climate change report.
To Mohamed, this shows that many asset managers are clueless about ESG.
“It was clear at Sasol that asset managers just used a tick-box approach and didn’t apply their minds,” he says. “We were one of the very few who voted against Sasol’s climate policy. It reveals their hypocrisy: for many of them, rands and dollars are all that matter, rather than the long-term interests of shareholders.”
Yet some are being dragged into the new reality. Last month, Standard Bank tabled a climate resolution proposed by Aeon and Just Share at its AGM. This resolution committed the bank to disclosing the total greenhouse gas emissions it finances (through lending to oil and gas companies) by March 2023, as well as updating its climate policy. It was a rousing victory, with 99% of shareholders voting in favour.
The coal conundrum
It’s probably true that most pension funds want to be catalysts for “good”; the crisp issue is whether they’d be willing to sacrifice returns to do that.
Davies says coal miner Thungela (up 1,043% in the past year) and Exxaro (up 37% in the past six months) are the perfect litmus test. Both stocks have been on a tear thanks to the ban on Russian oil and because financiers have been pressured not to finance “dirty” energy firms.
“Someone who really integrates ESG into their process [would] be willing to explain to clients that he or she has not invested in Thungela as it poses a fundamental risk to long-term sustainability ... but there are very few asset managers willing to have that conversation,” she says.
Ninety One’s Moola points out that putting pressure on banks and funders to stop funding fossil fuel producers only curbs the supply — but it doesn’t stifle demand.
“The problem is that since 2015, we’ve had a decline in investment in fossil fuels, so the price inevitably rises — which means the stocks of companies producing them rise too,” she says.
This is the opposite of what climate activists want. Rather than polluters being drummed out of business, the lack of investment makes their product more scarce, which causes prices to rise. It means that in the short term, ironically, the “dirty” firms outperform the “green” ones.
This illustrates another unhelpful truth: ESG funds typically haven’t outperformed the wider market.
Take the MSCI World ESG Enhanced Focus Fund (offered by Satrix on the JSE), which gives investors exposure to companies with “positive ESG metrics” in 23 developed countries.
Its largest holdings include Apple, Microsoft, Coca-Cola and Alphabet, Google’s parent. Yet over one year, it has delivered a 5.1% return — less than the 7% of the MSCI’s world fund.
Sygnia’s Itrix Global ESG Fund, which tracks the top 1,200 most “sustainable” companies, delivered an 6.8% return over the year to May. This isn’t bad — but it’s less than the 11.5% delivered by Sygnia’s fund of the top 500 US companies.
In an ideal world, investing “for good” should reap superior returns; in reality, that is taking longer to happen than many expected.
As Moola puts it: “Our primary role is to meet the objectives of our clients, and the vast majority have entrusted us to meet their financial return objectives. We incorporate ESG into our analysis, to make sure we incorporate externalities into our financial models, but we need to be clear on what our role is.”
Coronation’s Chester concurs: “Our primary role has been, and remains, to ensure people get good financial returns on their savings.”
Davies, however, argues that whether “dirty” companies make more money isn’t the point. Rather, responsible investing should be about pricing in their negative impact.
“Many industries that generate the highest returns are those with the biggest negative impacts,” she says. “Our economic system does not price those impacts, so the companies that cause them, and their shareholders, walk away with the benefits, while the costs are imposed on the rest of society.”
In any event, ESG indices are a flawed way to assess performance.
Top-rated ESG analyst Rob Worthington-Smith points out that both Sasol and Tiger Brands, which was mired in a reputation-shattering court case for spreading listeriosis through its processed meat, were given high ESG ratings.
“Nor did Woolworths or Tongaat appear on any of the major ESG ratings agencies’ negative watch list, despite each destroying billions in shareholder value,” he says.
It’s another illustration of how flawed ESG ratings can be, falling far short of the lofty promises made in marketing brochures.
Removing shades of grey
Given all these mixed messages, the question is: can this nascent concept, already mangled by over-eager marketing graduates, be rescued?
The experts believe that once everyone can agree on what constitutes an ESG fund, and how performance can be properly measured, things will improve. And there is hope.
Says Moola: “In five years’ time, it’ll be a different story. There are tools being built right now that will help, and interventions by groups like Climate Action 100+ are providing some uniformity.”
Climate Action 100+ is made up of 700 of the world’s largest money managers — speaking for $68-trillion in assets — including eight SA institutions.
Fingers crossed, these asset managers can thrash out a consensus on “best practice ESG”.
Already, there is progress. As the MSCI says: “We see an emerging common vocabulary that should aid transparency and, importantly, clarify choice. Painting a green sheen on funds will get harder, and verifying environmental claims easier.”
Rob Lewenson, head of responsible investing at the Old Mutual Investment Group, expects that a convergence of standards will remove many grey areas.
“The regulatory authorities — including in SA — aren’t that far away from doing a deep dive into these products, and putting in place standards to ensure that they are what they say they are,” he says.
For Mohamed, any regulation must be based on principles, rather than rules. And, he argues, there ought to be an oversight body to adjudicate complaints about mis-sold ESG products. “That’s how you’ll ensure there is more substance in these ESG pledges,” he says.
Another crucial step in saving ESG from an early demise in the marketing department lies in ensuring asset owners sharpen up.
As Vawda puts it, the South Africans who actually own shares need to clearly articulate their expectations to the asset managers handling their money. “There are few countries that could do with transforming its economy to make it more equal as much as SA. But this requires owners to play a greater role,” she says.
For Davies, the vehemence of Kirk’s response to the emphasis on ESG investing actually represents something of a watershed.
“The backlash has arisen from a realisation that greenwashing is the norm, not the exception. Getting closer to the point where there is actually accountability for what you say about responsible investing can only represent progress,” she says.
Rather than polluters being hamstrung, the lack of investment makes their products more scarce, which pushes prices up
— What it means:
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