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ESG’s reckoning

Many of these pages have been dedicated to our cynicism towards fund managers hopping on the bandwagon of so-called environmental, social and governance investing. That’s not to say we don’t think climate change or social issues are important, but as more money is being attracted to the ESG sphere, it is inescapably a marketing opportunity for those who manage other people’s money.  

Research company Morningstar’s global sustainable fund flow report shows how quickly the sector is growing. Globally, sustainable funds attracted $323bn (£232.96bn) in the first half this year. That’s up from around $120bn in the first half of last year and just $65bn in the first half of 2019. While this only includes funds which have a sustainability agenda and ESG criteria in their investment selection process, I doubt if there are any fund managers now who don’t ‘formally integrate ESG considerations’. 

As the sector continues to grow, more and more questions will be raised about its authenticity. A number of events in the past month have shown that the scrutiny placed on ESG investors is starting to escalate.

In a long essay published on Medium late last month, Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, explained why he thinks ESG investing is doing more harm than good to the critical challenges the world faces. Rich with anecdotes from the upper echelons of BlackRock’s executives, I urge you to read it. 

He highlights some important ESG-related issues which get overlooked. Many ESG funds are sold on the basis of having better investment prospects than their counterparts. However, if this was true, surely all fund managers would do it? Fancy’s worry is that rather than offer a solution to global problems, ESG acts as a “dangerous placebo” preventing necessary action. 

He notes BlackRock’s second operating principle – “we’re passionate about performance”. Fund managers are paid on the basis of their investment performance, neatly aligning these values. He says of the swathes of literature supporting the hypothesis that ESG mandates perform better: “After reading a few pro-ESG papers whose methods and conclusions I found rather dubious, something occurred to me: there’s always money to be made from telling people what they want to hear.” 

Former global head of sustainability at DWS Desiree Fixler has also spoken out against ESG practices. In a Wall St Journal report last month, she alleged that misleading statements were made in DWS’s latest annual report, which claimed that more than half of its $900bn assets were invested using ESG criteria.  

Fixler said that she had overseen an internal assessment, which found that the ESG risk management system employed by DWS was highly flawed because it relied on outdated technology and used ESG assessments provided by a range of external rating suppliers. 

As ESG comes of age, we can expect many more examples of sustainable strategies falling short and allegations of 'green washing'. As Fancy says, it is government legislation – not fund managers – that will exact radical change.

When it comes to your own investment portfolio, if you care about sustainability, make sure that you look under the bonnet of what you are investing in. And be prepared to accept lower returns, at least in the short term, for a truly sustainable strategy.