Week 47: What if the future of everything is now?

In this issue: ▸ Now corporate targets ▸ Now ESG market ▸ Now transition bonds ▸ Now petty penalties ▸ Now inequality and investments ▸ And much more...

Dear all, 

What about now? The future of everything. In absolute terms.

I read those lines a while ago in one of the world’s biggest business newspapers. It caught my attention and I plunged in. Yep, flying taxis, fungi as building materials, fuel efficient planes, cellular health treatments. After some time the endorphin level got higher, the breathing intensified, perspectives became wider, and at the same time that itchy urge to get to that future of everything. Everything is everything. The blessed comfort of future. Sometime in the future, soon, in only couple of years.

But what if everything in the future is now? Right here and now. The future of everything is now. What about that? Could that work? In absolute terms, simply now?

If we view our actions, or lack thereof, from the point of now and completely ignore the comfort of the future maybe we could avoid being in this space between never and maybe in which we dwell like restless spirits. We must face the now. What a trip that is. If the future only knew.

And when we talk about the now of everything, here are the some of the “now”s that may or may not make your Sunday less or more futuristic. 

Now corporate targets… 

Many companies are making bold promises to reduce their emissions of greenhouse gases to zero. According to Accenture, around one-third of the world’s 2,000 biggest firms by revenue now have publicly stated net-zero goals. Of those, however, 93% have no chance of achieving their targets without doing much more than they are at the moment. Few businesses lay out credible investment plans or specify milestones against which progress can be judged.

Please read that again. 93% have no chance of achieving their targets.

In order to curb such “dishonest climate accounting”, the report urges companies to make public disclosures of their progress towards decarbonisation using verified and comparable data. It implores regulators to make these disclosures mandatory. In addition, the authors say, firms should not claim to be net-zero while investing in new fossil-fuel supplies (which puts many investment funds in a bind) nor rely on reporting the intensity of emissions (per unit of output) rather than their absolute volume. And organisations making green claims must not simultaneously lobby against climate policies.

All very bracing, and perfectly sensible. Will business take it to heart? The UN has no authority to enforce any of the recommendations. The idea that increased scrutiny will inevitably lead to better behaviour remains untested. It is all too easy to imagine that it might instead lead to what you might call green-hushing. A dear child has many names, according to a Swedish idiom.  

A survey of some 1,200 big firms in 12 countries by South Pole, a climate consultancy, found that a quarter have set themselves stringent emission-reduction targets but do not intend to publicise them. Some companies are staying quiet to avoid attracting the ire of conservative politicians in places such as Texas, who decry “woke” corporations. Others, particularly in progressive redoubts like Europe, fear activist ire for not meeting targets quickly enough.

Read more here.

Now ESG market…

A potent cocktail of cheap money and sanctimony fuelled a boom in ESG investing, during which asset managers and bankers pitched themselves as environmental saviours. A fabel it is. 

Nemesis followed hubris. Russia’s invasion of Ukraine, and the subsequent elevated gas and oil prices, reminded the world just how much it needed fossil fuels, and how profitable investing in them could be. The cynicism of the asset managers and bankers was exposed as regulators cracked down on “greenwashing”.

DWS, Germany’s largest asset manager, was raided by the authorities following a whistleblower complaint. Britain’s advertising watchdog banned HSBC from making “misleading” environmental claims. Far from saving the world, ESG thus became mired in greenwashing and scandal.

There is just one problem with this fable of financial greenery’s fall to earth: the hard facts. True, appetite for ESG investing has fallen. Net inflows are well below those of last year. But for all the talk of a backlash, sustainable-investment funds have been much more resilient than other funds during this year’s downturn.

According to Morningstar, $139bn had flowed into sustainable funds by the end of September, compared with $643bn of net outflows from the broader market. European funds have attracted the bulk of the money, receiving 89% of total inflows into sustainable funds, but even in America such funds have drawn more money than other investment vehicles.

Why have green funds remained attractive? It is certainly not because of juicy returns. These funds tend to invest heavily in technology stocks, which often (strangely) achieve high ESG ratings owing to some combination of progressive Californian values, asset-light business operations and sophisticated human-resources departments which do things like diversity monitoring as a matter of course. Such stocks have performed poorly this year.

And while ESG funds are overexposed to this year’s losers, they are underexposed to the big winners: fossil-fuel firms. The iShares ESG Aware MSCI USA index, one of the biggest passive ESG funds, is down by 18% this year, compared with a 16% fall in the SPDR S&P 500 ETF, which tracks the S&P 500 index of American stocks.

Sustainable-fund managers point out that their investors are not overly bothered by short-term returns. People putting money into ESG believe the energy transition is not something that will happen over a couple of years, but a long-term trend that will mean their investments inevitably pay off. Oil majors may have been a good investment this year, they admit, but that will cease as deadlines for hitting net-zero emissions near. Sustainably minded investors tend to be young and have decades-long investment horizons. They do not fret about a few years of poor performance.

The EU’s Sustainable Finance Disclosure Regulation (SFDR), a rule on climate-investment standards, splits funds into three categories. Those in the greener bucket, known as Article 9 funds, enjoyed the biggest net inflows in the third quarter of the year. Article 8 funds, sometimes called “light green” in the industry, have seen net outflows – but not as big as those from Article 6 funds, which have no sustainability focus at all. 

Read more here.

Now transition bonds… 

As more countries and corporations declare their net zero commitments, they pose an immediate, practical question: is capital flowing in the right direction to help their pledges be met?

While investment in green assets and technologies has grown, their popularity offers only part of the solution and raises new, complex problems. At the same time, if turning “brown” companies into green ones is intuitively beneficial, the financing of such a transition is far from straightforward.

Spiralling demand for minerals such as lithium, for example, is indicative of a cleaner automotive industry as the material is integral to batteries powering electric cars. But it is also a cause of concern because of the environmental impact of its mining. Extracting lithium from the ground involves displacing vast amounts of groundwater and the risk of contributing to desertification.

In 2050, the World Bank estimates that demand for the mineral will have grown to nearly five times the levels of production seen in 2018.

Other raw materials essential for electric vehicles and renewable energy technology pose further quandaries. Cobalt, for example, is mostly produced in the DRC in hazardous conditions involving child labour, as campaign organisations have long warned. And this is something investors are well aware of.

While financing for green assets is abundant, financing the green transformation of heavy emitters is rather more arduous. Arguably, this is most evident in a jurisdiction such as the EU, which has created a green taxonomy setting clear boundaries between the “colours” of different companies but not guided on what is permissible, or even encouraged, in the transition from brown to green.

This tension is exemplified by the still tentative market of transition bonds, intended to finance the process. “Every time a client wants to issue a transition bond, they fear that [this will attract] a reputational risk,” says one of the leading European banks. “What is brown, according to the EU, is what is never going to become green but, in the middle, there is not enough space.”

The European Commission’s director-general for climate action, Mauro Petriccione, admits that the EU could do “a little better” in clarifying its position and expectations regarding the energy sources needed in the transition to a greener economy. He says natural gas is essential in the short term, but that by 2050 it should be out of the system entirely.

Some estimate low-carbon technologies will require over $90tn of investment over the next 15 years. Meanwhile, the financing of fossil fuel production is attracting more controversy. Many argue that green technology and infrastructure do not yet allow for the abandonment of this industry. “We cannot abandon the financing of oil and gas today, it would be impossible,” says Demetrio Salorio, UK head of global banking and advisory at Société Générale. “There is still a lot of ground to [cover to] define exactly what transition is, and how you apply it in different sectors.”

Read more here. 

Now petty penalties… 

The Securities and Exchange Commission (SEC) fined Goldman Sachs $4 million over the investment bank’s failure to follow ESG policies and procedures, the regulator announced Tuesday. 

The bank’s asset-management unit “had several policies and procedures failures involving the ESG research its investment teams used to select and monitor securities,” the SEC said. The bank’s alleged misconduct took place from April 2017 to June 2018, they said.

Goldman, which neither admitted or denied the SEC’s findings, agreed to a cease-and-desist order and a censure in addition to the monetary penalty, according to the regulator. Goldman’s fine is more than double the ESG-related penalty the SEC levied on the bank’s peer, BNY Mellon, in May. BNY Mellon agreed to pay $1.5 million after the regulator found the bank’s investment adviser division misstated how it applied ESG criteria when making investment decisions for some of its mutual funds.

The SEC said Goldman Sachs’ asset-management unit, between April 2017 and June 2018, failed to implement written policies and procedures for ESG research in one product, the SEC said. Once policies and procedures were established, the bank failed to follow them consistently prior to February 2020, the regulator added.

Goldman, in a statement Tuesday, said the matter related to the bank’s ESG Emerging Markets Equity Fund, Goldman Sachs International Equity ESG Fund and a US Equity ESG separately managed account strategy. The SEC claims the bank had employees complete a questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection. The bank’s staff, however, completed many of the ESG questionnaires after securities were already picked for inclusion and relied on previous ESG research. That research, the SEC said, was often conducted in a different manner than what was required in the bank’s policies and procedures.

Questionnaires? Goldman Sachs? ESG analysis is something else. Never mind. 

You can read more here.

Now inequality and investments…

The world is a village, or so it’s sometimes said in today’s digital age. But, if it were, it would be a very peculiar one.

On the one hand, the village would have undergone rapid advances, indeed it would have changed completely in just two generations. For example, the village’s population would have grown from 58 inhabitants forty years ago to 100 today. Of the original 58 inhabitants, 25 would have been starving. Fast forward to today, and that proportion would be cut by 75%. What a success!

But, on the other hand, it would still be an extremely unjust village community. Of the 100 villagers today, ten would still be starving. And, whether a person lived in abject poverty, or in luxury, would hardly depend on whether they were talented, educated or industrious, but, rather, almost exclusively on which part of the village they were born. Furthermore, half of the wealth of the entire village would belong to a single person. And, together with their nine richest friends, they would own as much as 85 percent of the village’s wealth and would account for around half of the entire village’s income – about 500 times as much as the poorest ten put together. 

Read more here.

Now who should decide what constitutes “good”?

Capital invested in ESG investment products are forecast to reach $41 trillion by the end of the year.

Aswath Damodaran, professor of corporate finance and valuation at the NYU Stern School of Business, is one of the foremost academic critics of ESG. He argues that the growth has to do with the marketing of the E, S, and G together, the lure of its subjectivity, and the fortuitous timing of investment in the once-overperforming technology sector.

The lure of its subjectivity may be the attribute that ensures its survival in the now-underperforming technology sector – but he also argues that it may contribute to its demise since it can be “all things to all people.”

Damodaran calls the whole ESG concept “fuzzy”. If 100 ESG experts were in a room together and asked to define and measure ESG, you would likely get 100 different answers. 

Read more here, a worthwhile read for all ESG professionals. 

Have a great now of everything week!

Kind regards,
Sasja