“...To allow the market mechanism to be sole director of the fate of human beings and their natural environment, indeed, even of the amount and use of purchasing power, would result in the demolition of society.... Nature would be reduced to its elements, neighborhoods, and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed...”
— Karl Polanyi
By Amberjae Freeman
Environmental, social, and governance investing — also known as ESG Investing — has been the discussion du jour in the investment world. It even took center stage at Davos in January 2020. Investor interest in sustainable investing is not surprising. After all, our environment and our society are important to us. We are simultaneously social and biological creatures and require both to be maintained in harmony so that we, and our children, can live our best lives.
In our pursuit of this goal, we buy organic, we recycle, we donate to charity, some of us even drive less or even better, use public transportation. Yet, there is one area of our lives where we may not fully actualize our eco-friendly and societal aspirations: investing.
The financial markets are transnational and elastic and respond to the financial positions of all of its participants. As such, it seems like an ideal place to help create wealth for ourselves as investors as well as accelerate the pace of positive change. Influencing capital flows allows us to direct money to the areas of our economy that enhance our ability to live in a more sustainable and equitable world. ESG Investing, when properly practiced, supports industries and economic activity that helps us to become more efficient. The goal is to do more with less harm to the planet, make it possible for everyone to have access to life-saving treatments, eat healthier, more nutritious foods grown sustainably for our continued vitality, and protect our essential natural resources like fresh water.
Also, ESG investors aim to identify companies that view their labor force as an asset rather than a liability or cost center. The best ESG practitioners attempt to identify companies that employ workers in manufacturing and services - but we aim to identify companies that pay an appropriate wage and provide healthy and safe work environments for their employees.
This concept is not new and is built on the philosophy and scholarship found in the social and life sciences over centuries.
Unfortunately, the broader financial services industry — largely responsible for our 401ks, IRAs, and SEPs — has been slow to develop products and services to align our investment portfolios with the environmental realities and needs of the broader society. When they do claim to make these products available, they often fall well short of what investors believe they are buying.
In other words: you don’t always get what you pay for (or invest in).
This isn’t about money being “moral” as the Financial Times references. It is about understanding that asset management is about creating and sustaining our assets for the benefit of ourselves, our children, and the broader society into perpetuity.
It is also about understanding the relationship between efficiency and sustainability and how adherence to this idea actually creates more robust, long-term value for our environment, our society, and our net worth. In short, sustainable capitalism in general, and ESG Investing in particular, is about balance.
I cannot stress this enough: the environment and our society are assets. We all need to take a stewardship position when we think about our precious, finite natural resources. We all need to take action to undo the damage our ecosystems have suffered because of the ravages of unchecked capitalism.
Society is not a spectator sport – we are all participants in shaping the society that we see around us.
In response to the growing demand by investors and by those who do indeed wish to build a better society, there have been attempts by some in the financial services industry to develop products that claim to address some of our most pressing issues. However, most of the investment products that purport to be “ESG” or even “impact” themed are not actually sustainable and their positive impact is more than a little dubious.
As pointed out by Etho in an interview given to CleanTechnica in October of 2019:
Because financial market participants place great emphasis on diversification to manage risk and return and also tracking error against [traditional] index benchmark[s], they may not realize the importance of ESG analysis in identifying risks that may be industry/sector-wide. Attempts to minimize tracking error to a broad market index means that you are still going to necessarily share many of its constituents, even ones that [are not] appropriate for sustainable investing products.
Excellent examples of this are present throughout many ESG products. For example, we have seen ESG products that use index methodologies that screen out the following items:
· Alcohol
· Gambling
· Nuclear Power
· Conventional Weapons
· Nuclear Weapons
· Controversial Weapons
· Civilian Firearms
Fossil fuels are conspicuously absent from this list despite the ‘E’ in the “ESG.” As such, ETFs built from this type of index might include oil exploration and production companies such as National Oilwell Varco, Hess Corporation, ConocoPhillips, Marathon Oil, and many others.
Also, curious is that the stock of the companies making these products are also constituents in their own ESG ETFs and mutual funds even though these companies are not ESG leaders. It makes us wonder how they define their ESG criteria.
For example, I was in attendance at a major SRI conference [in 2018] where a representative from one of the world’s largest asset managers was interviewed on the main stage. When asked about her firm’s significant investments in the world’s largest polluting fossil fuel companies, she responded by saying that her firm was not invested in those companies but rather, the people who are invested in their retail products are invested in those companies.
I found that to be an incredibly disingenuous response.
After all, their investors are invested in whatever holdings are put into the portfolios her company constructs. Her firm has total control over which stocks they put into their products.
Candidly, I was aghast.
Fast-forward to January 2020, much fanfare has been made over Larry Fink’s announcement about BlackRock joining the Climate Action 100+, an organization that launched in 2017, and who, according to their website is:
[A]n investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. The companies include 100 ‘systemically important emitters’, accounting for two-thirds of annual global industrial emissions, alongside more than 60 others with significant opportunity to drive the clean energy transition.
That BlackRock joined such a group was a rather surprising move, after all, it was not too long ago that the world’s largest retail asset managers, including BlackRock were increasing their coal investments.
According to the Financial Times, the Climate Action 100+ requires its signatories to press companies in their portfolios to reduce greenhouse gas emissions in line with the goals of the Paris Agreement, outline the board’s accountability on climate risk and disclose financial risks related to climate change.
A reading of the 2019 Progress Report drafted by the Climate Action 100+ discusses the progress made on their engagement efforts on climate action across sectors and industries, including the oil & gas sector. In this segment of their report they note that of the 40 companies on their focus list, representing a market capitalization of $2.41 billion, 80% of these companies have a significant amount (40% plus) of potential upstream capital expenditures related to projects that would not be needed in the International Energy Agency Beyond 2°C Scenario, (IEA B2DS)
Essentially, most of these companies are spending money to develop oil and gas resources that we cannot burn if we wish to mitigate the climate crisis. Further, they cite a Carbon Tracker Initiative report which states that 100% of the companies have some unsanctioned upstream projects under the same IEA scenario.
Our question at Etho is why is the Climate Action 100+ participating in this farce of corporate engagement with companies and industries that, as we pointed out previously, have spent several decades intentionally misleading investors and the public about the negative impact their products were having on our environment?
Why would the Climate Action 100+ continue to invest with these companies knowing that those holding fossil fuel assets (coal, oil, gas) cannot monetize them without grave consequences to our environment and our investment portfolios?
The “Climate Action”100+ boasts 370 investors with more than $35 trillion in assets under management. Some of those trillions belong to those of us who have investments in Blackrock products or various pensions, banks like HSBC, and many other places where we all invest. In essence, those are your assets they are putting at risk while they have talks and deliver empty platitudes about how X company has promised to do better over the next 20, 30, 40 years.
However, the Intergovernmental Panel on Climate Change (IPCC) says we do not have that much time. In fact, according to their 2018 report, we have about a decade.
If they truly wish to take action on the climate, as their name suggests, they should divest our money from these companies which they state in their report have a market cap of $2.41 billion immediately and create the kind of investment portfolios that allow us to invest in the industries and companies developing technologies that are trying to solve our energy and other needs sustainably.
Etho Capital’s mission is to create diversified indices and portfolios of only the most climate-efficient and sustainable companies' stock. Each resulting portfolio emits 50-80% less carbon pollution per dollar invested than conventional benchmark indices, while also avoiding companies that are not environmentally or socially sustainable.
This isn't just good business, it's in the best interest of ourselves, our families, and society — as we know it now and how we intend to sustain it into perpetuity. It’s so simple, a Swedish teenager could figure it out.
The views and opinions expressed are those of the author and do not necessarily reflect those of Etho Capital, LLC.