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The ESG Review: The war is shining a harsh light on the frailties of ESG investing

There have been several big media articles continuing to question the sense of ESG frameworks and investing this week, a piece in the Mail caught my eye because of its attempt to draw together that recent scrutiny with a few things Elon Musk said. And by shoehorning the word “woke” into the headline, it doubtless to got regular readers frothing.

It’s not an authoritative piece. In fact, its main bone of contention is that ESG ‘rules’ have become “twisted to insanity”, with no whiff of hypocrisy whatsoever in later assertions such as “ESG, a European Union-sponsored checklist..”

It’s trussed up in a way that only the Mail can. Beyond Elon’s latest musings, there’s nothing new in the piece - issues-wise, it centres on the hole blown in the side of the good ship ESG by the war in Ukraine, that the defence sector may not have become “ethical” in the eyes of ESG raters.

That’s a point that has been poured over more convincingly, and with new aspects, this week by the Financial Times in particular. An opinion piece on Tuesday covered how ESG was “grappling with shifting priorities” in light of Ukraine, making the case that the situation was both a “curveball” and one that should precipitate a shake-up of the current criteria-based, checkbox-infused approach. “Fundamentally, it has shone a light on the near-impossibility of devising the criteria investors should use to draw red lines,” it said.

And the paper also touched on ESG follies in a piece about tobacco firm ITC’s ESG investment push, plus covered BlackRock moving a €1.4 billion corporate bond to its ESG index.

Bloomberg, meanwhile, presented a more positive and upbeat opinion that poured at least some droplets of cold water on recent rumblings about ESG and the defence industry. Headlined ‘ESG goes to war’, it rounded-up commonsense perspectives and outlined why “it’s the ESG age now”, while pointing to likely necessary reforms.

Where is all of this heading? Well, just a few months into the COVID-19 pandemic, observers were falling over themselves to proffer that “we will not go back to how the world was before, it will be a new normal”. It feels like ESG, having had its roots in stakeholder capitalism ideologies and built towards a systemised - and relatively black and white - approach to assessing corporate value and success, is not going to revert to its stage of evolution prior to when Putin’s forces began the invasion.

The war is shining a harsh light on the frailties of ESG investing and classification. Some things will have to change, but it’s both the need for a rethink and the momentum behind supporting a more “ethical” (hat-tip: Daily Mail) world that are driving forces.

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

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