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Week 37: It's time we get our hands dirty
It's time we get our hands dirty and move beyond ESG ratings. We must also realise that ESG is extremely complex. And that banks can save the planet.
I hope everyone is well and safe. And ready for a new edition of ‘ESG on a Sunday’.
It's time we get our hands dirty
This week I have to start with the interview with me in New York Times. What I’m trying to explain in the piece, based my 20 years of experience in the sustainable investing space, is:
We can’t make ESG driven investment decisions about companies based on reports and data which haven’t been verified to some extent with reality checks.
We as investors cannot claim to see impact and improvements from our desks in London, New York, Frankfurt, or Zurich.
Real engagement with investee companies needs to take place where their business is.
We need to get our hands dirty.
It’s time we move beyond ESG
All of this also points to the shortcomings of ESG. I would even say that a sustainable future requires us to look beyond ESG. As argued in this interesting article from Financial News, scoring stocks for green and social factors is a good starting point. But it cannot provide the full picture.
A telling example is Boohoo. Over the summer, the fashion brands group found itself at the centre of a scandal. The company’s share price dropped 42% over three days in early July when reports surfaced that its suppliers in Leicester were paying below minimum wage to garment-makers.
Yet the company was rated highly by many ESG rating agencies. An ESG rating aggregator, CSRHub, shows that Boohoo rates better than 70% of over 20,000 companies worldwide.
Then you think of H&M and the fact that the stock of this company is also in many ‘sustainable’ investment funds (read my analysis on H&M here).
Beyond ESG is set to be the next big revelation in our industry. I believe it will change the entire landscape of ESG/sustainable funds.
ESG is complex
What about the clients? What about the consumers who want to make a difference by investing in a sustainable way?
Given the confusion among many advisers about where environmental, social and governance solutions may or may not fit into their investment advice, we can hardly expect consumers to fully appreciate how they work.
There are significant limitations to ESG investing, and the shock and outrage we saw when the Boohoo stock was found in some ESG portfolios recently will be repeated many times in future. ESG is complex and if anyone tells you it is not, they are wrong.
Read more in this opinion piece by Phil Young from Zero Support.
Climate risk in the U.S. financial system
We should never forget that behind all of this we have built systems to support our ways of action (or lack thereof). And so, we move on to the system-risk in financial systems, but not the usual financial ones.
Earlier this week, the U.S. Commodity Futures Trading Commission (CFTC) released a report entitled Managing Climate Risk in the U.S. Financial System. It’s heavy reading. Not because of the length side of the report, but because of the messaging.
The report describes how climate change is already impacting or is anticipated to impact nearly every facet of the economy, including infrastructure, agriculture, residential and commercial property, as well as human health and labour productivity.
And yes, this reality poses complex risks for the U.S. financial system.
These risks include disorderly price adjustments in various asset classes, with possible spill over into different parts of the financial system, as well as potential disruption of the proper functioning of financial markets.
In addition, the process of combating climate change itself – which demands a large-scale transition to a net-zero emissions economy – will pose risks to the financial system if markets and market participants prove unable to adapt to rapid changes in policy, technology, and consumer preferences.
Remember one thing, a real global financial transition will only be possible and give results if we have the U.S. capital and financial system with us on that journey.
So far there have been limited efforts in the U.S. in this space. Maybe this report can help move things faster. We need the U.S. with us in this fight.
How banks can save the planet
Luckily, there are heavy-weight minds out there who believe that banks can and should save the planet.
Two months ago, Green RWA published their first white paper, entitled “How banks can save the planet”, in which the authors argue that regulated capitalism through banks can contribute to free the planet from the deadly threat created by an extremely fast and energy-thirsty growth over the last 150 years.
On top of Green Bonds, banks, by analysing their climate-related risks, will have to shift their banking book to optimise their long term capital charges, contributing to the 600 billion of green investments needed each year (on top of the $5,700 billions yearly infrastructure investments) for the next 15 year.
This is the OECD estimate to reach the Paris agreement goal of limiting global warming well below 2.0 degrees by 2100.
This requires the harmonious support of regulators across the world to avoid the free-rider problem of GHG emissions. But it is very interesting to note that – thanks to the 2nd pillar of the Basle II – banks have the obligation of reviewing internal capital adequacy covering all risks.
Growing ESG risk in emerging markets
Remember that enormous oil spill in Siberia I wrote about some time ago? Well. An unprecedented USD 2.1 billion environmental damage assessed by the national regulator and claimed from Russian miner Norilsk Nickel for a fuel spill indicates growing ESG-related financial exposure of commodity companies operating in emerging markets, Fitch Ratings says.
This may also increase the importance of environmental factors in ESG assessments for such companies, although governance issues still prevail.
In this article you can get very good overview of how some – Fitch in this case – rate these mining companies and see the names of companies that are not rated so well.
Wildlife populations are in freefall
We round up with one that really hurt my soul. This week the WWF and the Zoological Society of London (ZSL) released their Living Planet Report 2020.
It’s such a saddening read. On average, global populations of mammals, birds, fish, amphibians and reptiles plunged by 68% between 1970 and 2016. Two years ago, the figure stood at 60%.
In short, wildlife populations are in freefall around the world, driven by human overconsumption, population growth and intensive agriculture.
Read this article in The Guardian for more details.
Keep your spirits up and have a great week!
Best regards, Sasja