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The ESG Review: Will Vanguard’s moment of truth reshape ESG investing?

Giant asset manager Vanguard drew stiff criticism recently when it announced it was withdrawing from a major net zero initiative a couple of years after joining it.

But the u-turn may just force a reflection over ESG investing that brings a number of inconvenient truths into plain sight - and even gives rise to more impactful investment.

This long-read article in Harvard Business Review summarises Vanguard’s decision and the potential ramifications (with thanks to David Gallagher for sharing).

In pulling out of the Net Zero Asset Managers’ initiative (NZAM), Vanguard has been lambasted for putting shareholder returns before ESG interests, in this case decarbonisation. But the article makes the case that for a company which manages assets for millions of individual rather than institutional investors (cue memories of those ‘V for victory’ TV ads), this actually represents “a return to reason”, given how poorly-defined ESG investing is.

It also makes the crucial point that ESG investing is not directly tied to decarbonisation.

As the HBR piece concludes: “Investors who wish to use their capital to back sustainable solutions may soon have vehicles available that focus on social and environmental impact. At the same time, muddled, oversold ESG funds that promote superior returns and impact will shrink, and hopefully vanish.”

In other words, it may come to pass that a historically cautious asset management company ends up being the straw that breaks the camel’s back of a relatively wild ESG investing era, and ends up reshaping it, with clear definition and greater direct impact.

It certainly seems that with ESG definitions and investment standardisation still a work-in-progress, criticism around genuine intentions continues. The Guardian this week covered a think tank’s report into mega funds such as BlackRock and L&G using ESG labels to invest in companies involved in fossil fuels, while new European Commission clarifications outlined in the Financial Times risk further greenwashing accusations, given that ‘sustainable’ funds previously downgraded will now see that reversed.

CNN perhaps sums up the situation best: ESG investing is dying. That’s not a bad thing. It makes the case for the evolution of sustainable investing currently underway being like a snake shedding its skin, with a “perfect storm of negative sentiment” including the ongoing war in Ukraine forcing inconvenient truths to the fore. One commentator opines that “ESG won’t be as glamorous as it was before, but it won’t be a politically explosive term either”.

Glamour was not what ESG was ever going for. A short, sharp reality check may be just what is needed for investment markets, in the long run.

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

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