Week 39: We see things the way we are

In this issue: ▸ Pathological Demand Avoidance ▸ Emissions are increasing, 1.5C is vanishing ▸ Most ESG is not ESG ▸ But we are so close to real ESG now ▸ Banks and investors increase spend on ESG

Dear all,

“We don’t see things the way they are. We see them the way we are.”  

I read this quote in some newspaper a couple of days ago, and it keeps coming back to me. Teasing me, making me wake up with that feeling of not really understanding, unsettled, an itchy feeling.

Looking at the world today, it is more than obvious that we don’t see things as they are. It made me think of Pathological Demand Avoidance as a rare behavioural phenotype, characterised by an overwhelming or obsessional need to resist or avoid demands. Some of the symptoms are: 

• Resists and avoids the ordinary demands of life.

• Uses social strategies as part of avoidance, for example, distracting, giving excuses.

• Appears sociable, but lacks some understanding.

• Experiences excessive mood swings and impulsivity.

This could also be a description of how we deal with the climate emergency. And when you look at the possible treatments it becomes even more interesting: “sensory support, help with identifying emotions or managing anxiety, or support with speech and communication.”

Much of the world’s journalism is little more than court gossip: who’s in, who’s out, who said what to whom. At the same time, issues of immense, even existential importance are largely or entirely ignored. Why?

Apparently, the ways we engage on the issues such as climate emergency, inequality, or even ESG do not work, and have not been working for a very, very long time. We are simply not there. The transition to a more sustainable future is about the physical energy transition as well as about the human energy transition.

Emissions are increasing, 1.5C is vanishing

The head of the International Renewable Energy Agency has a blunt message: the world is well behind on the clean energy deployment needed to prevent the worst ravages of climate change. “If we don’t change dramatically the way we produce and consume energy, 1.5C is close to vanishing,” Francesco La Camera, director-general of Irena, told FT in an interview in Pittsburgh last week.

Francesco La Camera is right. For example, the current global spending on clean energy is about $1tn dollars a year, well shy of the $5.7tn the world needs to green its economy sufficiently to avert the worst climate impacts, as La Camera pointed out.

And the energy shortages triggered by Russia’s invasion of Ukraine have not helped, given the revival of coal generation and the rush to secure alternative fossil fuel supplies that have ensued.

“The last year is not playing in favour because of the energy crisis. We will have an increase in emissions over the next two years,” La Camera also said.

The question is not if the energy transition is in place. Because it is in place. The question is if this is happening at the speed and scale needed to put us on a pathway aligned with the Paris agreement. The answer to that question is a big “NO”.

Most ESG is not ESG

Over the last couple of weeks, I have received so many questions about what is going on with ESG. ESG is the only thing the past 100 years that has forced the financial industry to take responsibility for externalities impacted by their investment and lending decisions. So why is ESG under such assault?

The simple answer to that question is that most of what is claimed to be ESG investments and/or lending, is not really ESG and never was ESG. It was all empty promises, marketing, PR, and higher fees. It was never the intention that it should become a reality. But profitable? Oh yes.

The promised results never came, the clients got disappointed, and regulators arrived too late at the party.

Any evidence to support that narrative? Yes, here’s one example. Nearly half of asset managers don’t base any sell orders on ESG, a survey has shown. According to it the article, forty-three percent of asset managers were unable to provide an example of a sell decision driven by a view on ESG issues in the last 12 months, a larger proportion than last year.

Thirty-five percent could not show they’d made a buy decision based on ESG, up from 26% a year ago, according to the survey of 122 asset managers managing $37.7 trillion by investment consultants Redington. The proportion of firms aligning remuneration policies with sustainable investment metrics fell to 62% from 70% in the 2021 report.

But we are so close to real ESG now

A more complex answer is that ESG, when done for real, unpacks fundamental flaws in the valuation models which has been used by the financial industry over the course of history. The more precise and validated “soft” data we have, i.e. environmental and social, the easier it becomes to detect these fundamental flaws, correct them and make far better investment decisions.

The reason this assault is taking place is the very fact that we are so close to the bottom of the financial valley, where stones, cracks and baren land lie in the open. In other words, we are so close now.

Strategically ESG is precisely where it needs to be. On the tactical side much more can be done. In fact, a second wave of corporate sustainability and sustainable finance – ESG 2.0 – is on the rise.

Reporting is one of the issues. When e.g. a German or Brazilian corporation reports its financial data, it uses the fairly universal IFRS model. But the same company’s ESG reporting can be based on more than 30 different standards. This multiplicity adulterates data quality and hampers comparability between companies.

Additionally, not all sustainability reports are yet properly audited, providing a fertile ground for greenwashing. Fortunately, many of these reporting standards are in an accelerated process of merging. And in the coming years, companies will be expected to use the global disclosure standard under development by the ISSB (International Sustainability Standards Board), announced at COP26 in 2021. In Europe, a new reporting standard will be enacted into law by the end of the year. 

Banks and investors increase spend on ESG

In the tactical space things are happening too. There is an apparent shift towards impact in sustainable investing, with 14 percent of ESG investors now investing with conviction, as opposed to purely for returns: Boring Money’s Sustainable Investing Report 2022 found 14 percent of investors were so committed to ESG that they put ESG first and performance second when it came to selecting their investments.

ESG had held strong amid the recent rotation to value and the market turmoil seen this year, which has dented investor sentiment overall. Both Boring Money and Broadridge found appetite in sustainable investing was consistently high despite investor sentiment being low.

In the UK, about a fifth on investors said they still intended to buy ESG assets, while in the US general awareness of the asset class has grown by about 10 percentage points in the past year, and four in ten investors claimed they were now familiar with ESG, with two thirds considering ESG at least some of the time when investing.

With 20% of retail banks planning to significantly increase spending on ESG, sustainability is the next frontier for competitive advantage.

According to a new report by Boston Consulting Group (BCG), three-quarters of retail banks plan to increase spending on ESG initiatives, and almost 20% of them significantly. 

As someone once said. First they ignore you (ESG 2000-2008), then they laugh at you (ESG 2008-2015), than they fight you (ESG 2015-present) and then you win (2024-future).

Have a nice “the way we are” week…

Kind regards,
Sasja