Is ESG branding just another marketing trick?
In a recent Globe and Mail article titled, “The ESG investment industry is broken,” James Rasteh, a human and environmental rights activist and founder and CIO of Coast Capital Management, wrote,
“. . .over time, I’ve come to realize that the ESG investment industry is by and large little more than a marketing mechanism, and will not lead to productive change.”
“Most companies that actually focus on environmental, social and governance concerns are adaptive, and led by principled leaders. The flight of capital toward these companies, and away from poorly managed ones, does nothing to improve the ESG parameters of the companies most likely to pursue destructive environmental or social practices. In fact, it does quite the opposite.”
Mr. Rasteh is not alone in his skepticism.
In a video interview with CNBC, outspoken venture capitalist and engineer Chamath Palihapitiya called ESG marketing a “complete fraud” and a “joke.”
Mr. Palihapitiya went on to say that,
“I think what people are doing right now is using it [ESG marketing] as a way to . . . borrow money from the ECB at negative rates.”
One of the major problems with ESG investing right now (which Mr. Palihapitiya alludes to in the aforementioned interview) is that it’s difficult to conduct due diligence on a company’s entire supply chain. For example, approximately 54% of Google’s workforce was made up of temporary workers, contract employees, and vendors in 2019. Without access to reliable, up-to-date data (e.g. how does vendor #49,140 treat its employees? Are they outsourcing their production processes to hide their true carbon footprint?), it’s near impossible for investors to accurately evaluate a company’s ESG performance.
“The CFA Institute’s [Future of Sustainability in Investment Management: From Ideas to Reality] report finds that, ‘ESG data are substantial and fast growing, but unwieldy.’ Furthermore, it finds that ‘company reporting plays a key part in the sourcing of ESG data… and that the consistency and comparability of ESG data from companies is poor.’”
Further complicating the matter is the fact that there is no standardization of what is good or bad in terms of ESG. Different ESG funds can have different parameters for what constitutes a “real” ESG company.
Fortunately, progress in this area appears to be being made — new EU regulations are expected to come into force by the end of 2021 that will add social and governance factors to the EU Taxonomy Regulation. The EU Taxonomy Regulation, which is intended to be a framework for identifying sustainable activities, currently only contains environmental considerations. The hope is that this expanded framework will make it easier for investors to identify true ESG companies.
ESG Investing Set to Mature in 2021
Regulatory bodies, companies, and investors are beginning to wrap their heads around what it means to be an ESG company. However, further transparency will be necessary — in conjunction with measures like the EU Taxonomy Regulation — so that investors can distinguish truly responsible companies from marketing gimmicks.