The ESG Review: ESG and the battle for its future

Hindsight, it is very often said, is a wonderful thing.

There are many moments since the onset of Glasnost that western economies doubtless should have paid the long-term future ambitions of Russia more attention.

And there are likely many moments in the short history of the ESG ‘movement’ when, faced with criticism and decisions made to counter its subjectivity and loosely-rooted intentions, there should have been greater acknowledgement that things had to change.

Over the past week, pieces in major media have spotlighted how the Ukrainian invasion has thrown into doubt the whole premise of ESG, to the point of sometimes ridiculing the entire notion. The Sunday Times article, Putin’s war on Ukraine exposes the folly of ESG, pulled no punches and stuck the boot in for good measure.

“The investment industry has some hard questions to answer in this bleak new light. They say the first casualty of war is truth; in finance, it has been the ESG movement’s credibility,” it execrated.

And then: “In some cases it has even begun to undermine the tenets of democracy, as decisions that should be made by governments are instead taken by fund managers based on external pressure from campaigners.”

It went on to decry the inconsistency, subjectivity and binary basis of ESG-led investing, and the “bloated industry” of advisers around it (yep, that includes us).

Painful a punchdrunk-enducing read though it was, a lot of it was right. The cold light of war calls much into question. Where it was wrong, in my view, was the assertion that ESG as an investor doctrine and business transformation focus needs to be “replaced with something nimbler and more nuanced”.

ESG does not need to be scrapped or slimmed. It needs to evolve, quickly. Definitions, standards and methods of scrutiny must be made fit for delivering on the full promise of stakeholder capitalism - that genie, troubled though it may now appear, has long left the bottle.

It’s not so much that ESG has been found out by the war, but that its (with hindsight..) obvious inadequacies have been cast in a new light, in a new context, that makes it look more than a little bit silly in more than a few places.

This was a theme continued by Bloomberg in a piece about ESG being at a crossroads and this more cutting one about the war casting a bleak shadow over it all. And following this column last week (in fairness, one of many, many pieces on the topic) of the new ESG challenges being faced by the defence sector, the Financial Times raised the question of an investor rethink over weapons and equipment. And the Los Angeles Times added more scrutiny with a piece covering ESG funds’ investments in Gazprom, Rosneft and Sberbank.

With hindsight, ESG has been in severe need of shake-down for some time. It needs application to the real world, in a different era of risk. And at the risk of some nausea, as ESG’s first iteration may have been found wanting, perhaps now it’s time for ESG 2.0.

The ESG News Review is written by Steve Earl, a Partner at BOLDT

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