Who killed the ESG party? | FT Film

[Music] ESG was everywhere now 2024 tumble weed was it all just a meaningless marketing exercise or has the way people invest our pensions and our savings has that genuinely changed ESG is the next evolution of capitalism when we talk about ESG we are talking about the future of humankind the story of ESG is a multi-trillion dollar marketing scheme it's a story about hype ambition Humanity responding to a set of inconvenient truths with something short of real solutions the ESG hype cycle is over those three letters may even disappear and we're going to move to a

much much better place because of [Music] it ESG is trying to think of ways to invest money in companies whether they are company bonds or stock in a way that helps the environment rather than hurts it in a way that advances social aims rather than harms them in a way that encourages companies to be governed properly soundly with lots of checks and balances and with appropriate controls so the E is environmental the S is social and the g is governance the term became trendy in the aftermath of the Paris agreements in 2015 to keep global

warming well below 2° above pre-industrial levels there was quickly a realization that the private sector would have to play its part in [Music] [Applause] that I'm Nicola tangan and uh I'm the CEO of the Norwegian Sovereign wealth fund we run $ 1.6 trillion dollar and we own roughly one and a half% of all the listed equities around the world ESG is very very important climate is a Financial Risk now we are invested in all the companies across the world and so if one company pollutes we will pick it up in the rest of the portfolio

if you have a long-term View and you really care about both the climate and the financial returns you have to care about these things there was a period in the late 201 when I couldn't pick up the phone or open up my email without being bombarded with people just desperate to talk to me about their ESG credentials and now 2024 tumble weed it does not come up in conversation at all the excitement around ESG reached its peak in 2021 at the cop 26 climate conference in Glasgow in the UK there was a big announcement the

Glasgow Financial Alliance for Net Zero most of the biggest financial institutions in the Western World declared their support for efforts to reach Net Zero carbon emissions but there's a big difference between declaring one's support and actually acting on it I feel the ESG hype cycle is over I think we are at that point of disillusionment the ESG party as we know it is over so I would think about the ESG industry is having produced some good things that we need to keep some bad things we don't ESG is here to stay but it's not going

to be a linear Journey the question is who killed the ESG party does a number of suspects our first suspect is Vladimir pson one of the really big moments for the ESG industry was that invasion of Ukraine higher hydrocarbon prices just following the Ukraine Invasion the higher cost of capital with the increase in interest rates have hurt the performance of ESG driven strategies so if you're an ESG investor during that period Then you are dramatically underperforming The Wider Market which is being boyed by oil and gas stocks Russia's invasion of Ukraine had the effect of

putting more focus on energy security and safety rather than thinking about climate while markets were going up and everyone was safe we could spend all our time arguing about es and as soon as the world got Scara add a bit of Co plus a bit of geopolitical tension War Warheads Invasion tank suddenly we all woke up and went boy boy this stuff is immaterial compared to what's going on in the real world surely it makes sense to help fund the companies that provide the ammunition that countries need to defend themselves from hostile actors and this

was one of the things that made people think hang on do these criteria actually make any sense people forget that the oil and gas sector the energy sector has underperformed the S&P 500 for the last 10 years people keep waiting for the the last Hara when will it finally make me more money than my tech Investments and get the war in Ukraine you get this Spike get off of fossil fuels if they're the cause of the problems move quickly away from the cartel of fossil fuel providers and move to this new system wind and solar

if you can capture it and store it and you can make it a source you don't need to be transporting it around the world having Wars intervening with your pipelines and so on our next suspect is Tucker Carlson he was instrumental in leading this us political backlash against ESG because of ESG Germany is now rationing electricity because of ESG farmers are in Revolt in the Netherlands Carlson is arguably more responsible than any other individual for dragging ESG Into the Heart of the culture wars Carlson helped to move the political needle in such a way that

we've now seen very high-profile politicians notably Florida Governor Ronda santis talking about ESG all the time we've seen financial institutions under really quite serious pressure through various means including withdrawing billions of dollars in portfolio assets from certain asset managers which is what some Republican state governments have been doing it's not really that surprising uring therefore that a lot of them are at the very least going a lot quieter on all this ESG promotional stuff separately to G fans there's been another initiative also very important called climate action 100 plus asset managers using their clout to

put pressure on the companies that they invest in the first phase was very much focusing on disclosures second phase was what companies were actually doing so we're no longer just talking about disclosing data we're talking about companies taking action to reduce their emissions some of the members particularly us members Black Rock JP Morgan Asset Management Pimco Invesco State streets at this point they got worried it might not be in the interests of of their clients of their investors for these asset managers to be telling all these companies to reduce their emissions blackr which is by

far the biggest asset management company in the world became a central part of this story partly due to the role played by its chief executive Larry thinkink there was a period when he seemed to be arguably the most prominent standard Bearer for ESG Larry's Vision around how we can use the gears of capitalism to fix its own shortcomings Capital starts to flow towards more responsible providers and Society this was all a very alluring thesis because you make money and you improve the world at the same time Black Rock and Larry think in particular became really

Central targets for those political and media attacks especially from the rights black Croc has certainly become less vocal around ESG in fact Larry think now says that he prefers not to to use that that term do I think he's one of the bad guys I don't they've created some of the biggest clean energy funds in the world that are making money for their investors that's their job they do that very very well was a lot of um pressure on him politically yeah and did he fold a little bit yes he did but I think anybody

under that kind of pressure would have responded in the same human way in 2022 Northern Trust put out one of its regular surveys to get an idea of what the priorities are for asset managers and in 2022 at the start of that year before Russia's invasion of Ukraine ESG was top of the list 2024 it is absolutely dropped down the list in Europe there is far more support from government regulations public opinion is probably more positive on sustainability the oil and gas industry is simply a bigger part of the economy in the US than it

is in Europe there is a much higher proportion of the population in the US who question the science of climate change the change we've seen in the US is uh worrisome because there is less focus on the climate initiatives that the companies take it has not changed the way we our business we have roughly 3,000 meetings with companies every year we would discuss governance and of course also climate we vote at uh roughly 12,000 agms every year on 120,000 proposals even though we only uh account for one and a half% of all the votes in

the world we also see that we have roughly an additional three percentage points of kind of additional influence I other shareholders who follow what we do and we've also seen in terms of the flows of money we've seen bigger changes in the US than in Europe some in the asset management industry saw the rise of ESG as a great opportunity inflows into ESG funds were really really strong on both sides of the Atlantic in the first quarter of 2024 we still saw inflows into sustainability Focus funds in Europe to the tune of something like 11

billion whereas in the US it was the single worst quarter that morning star has recorded nearly $9 billion came out of sustainability funds es and or three letters that do not leave your mouth if you are on marketing trips across various States in in the US if you're an asset management firm do I think the big asset managers uh helped end the party no I think big asset managers smell the wind and if they think there's a backlash they will be very very fast to change course t fancy previous the chief investment officer for sustainable

investing at Black Rock has since become a vocal critic of the approach to ESG that's been taken in large parts of the asset management and financial industry the ESG thesis around Society improving because companies discover social purpose it's a free market self-corrects thesis right it's a neoliberal the free market will figure this out because people will have new data Frameworks and companies will start to do the right thing on their own if you're consumer facing brand you know it's not a good idea to have a supply chain issue with you know with with slave labor

but for the majority of the companies in the economy doesn't really matter the reality is they're going to do whatever the cheapest thing they can do is and they're going to do that within the rules and I don't think that we should impune business people for making the decisions that are in the interest of their shareholders they're playing the game exactly the way they should be and his arguments is that the appropriate response to to climate change and these other challenges must must involve policy from democratically accountable governments what do we actually need to do

to address some of these problems and where does that incur short-term sacrifice and how do we impose those sacrifices in a way that's mandatory and systemic maybe in the absence of serious government action there is a real tension between fiduciary duty and the kind of action that climate action 100 plus was calling for you should have a reasonable expectation that wherever you've got your pension money parked someone somewhere is doing the best possible job they can to make as much money for you as possible how would you feel if the asset manager running your pension

plan made certain ESG assumptions that you don't agree with and what happens if those assumptions are wrong they're too severe and that actually costs you 2 to 3% a year on financial performance I think climate risk the challenge is that it's it's quite longterm so a lot of investment strategies have a horizon that really doesn't think about you know about the longterm if you are a shortterm h fund you're going to own the Securities for you know 24 hours you may not care but if you are a universal owner that are that is going to

own that Securities for 50 years you are going to Care immensely about what's going to happen to that company in 30 years time we could be through two degrees we could be past tipping points we could be in climate chaos investing to avoid that happening is the most responsible thing you could do as a fiduciary we have one overriding goal with this firm and that is to make money climate is a Financial Risk you need to take it into consideration in order to fulfill your fiduciary duty to your investors another suspect would be Desiree fixler

desire fixler was the head of ESG at DWS big German asset management company spun out of Deutsche Bank she really exposed the Practical problems that big investment firms have measuring this investment for good anding this investment for good there was a tremendous gap between what the company was saying publicly about their ESG capabilities to what they were actually doing internally you can't mislead your shareholders and investors you can't misrepresent and you certainly can't missell your products wire card was placed as a top position in a DWS ESG Flagship Fund in 2020 so at a time

when eny won't sign off on their financials DWS actually upgrades wire card on on better corporate governance and sites business ethics Marcus Brown the CEO of wireart has been arrested Yan maralik is on the run and the company is insolvent there was a statement once made that uh from the CEO you and your American friends are paranoid is my American friends like he talking about this secc in the doj I was a tremendous pain in the ass I just didn't stop and finally um at my last board meeting I pretty much like banged on the

table that these are Urgent issues it was a matter of a few weeks later I got fired I knew that green washing was absolutely pervasive in the market ESG became a huge marketing tool for other asset managers I knew that most of the claims out there were I decided to go public I had documents I had evidence it's really been one of the most impactful whistleblower allegations there was a high-profile raid by authorities in Germany on a DWS office DWS dramatically reduced the quantity of assets that it claimed to manage under ESG principles I know

that I definitely contributed to to killing this ESG part party one of the biggest problems with the SG is how do you measure this stuff that's created an opportunity for ratings and index providers the biggest of which in the ESG space is a company called msci so an ESG rating is an opinion how those variables will impact the financials of that company the way that I want to measure it will almost certainly be different from the way that you would want to to measure it we're going to arrive at different opinions we're going to arrive

at a different rating because we're not just talking about climate stuff we're also talking about social stuff and governance stuff different ways of measuring virtue come up with different results it is something that will develop over time clearly it takes effort to understand those characteristics and it will take even more to price those characteristics into the value of assets and to the allocation of capital I've had many conversations with clients where they were very confused by some of the rating agencies where the same company was rated very highly by one agency and very poorly by

another agency controversy around that industry has led to Growing calls to regulate them and we're seeing movement around that particularly in the EU you cannot regulate ratings themselves regulation uh on ESG has has to uh be more on the ingredients that you're using to come up with a rating if I'm an investor and I look at an opinion by msci and I look at opinion by others and then I form my own opinion that's a richer world than simply somebody giving it to you directly when you go buy a product in a supermarket it's going

to tell you what the ingredients how much salt they have how much sugar how much you know uh fat and other other other sources you're not going to tell people whether they should eat a sausage that is a free choice in a society there is a need to scrutinize data but in the end when it comes to opinions rather than data diversity of opinion actually enhances the investment process it's not really possible to prove whether a company is completely green what if the product that it produces is green but that further down the supply chain

the other companies that it relies on what if they don't quite meet the same criteria what if they're not quite as virtuous as the ultimate company that an investor is choosing to invest in ESG is an umbrella term and it means many different things to different people it can be a risk management feature how the outside changing world might affect the company you're investing in it can also mean how the company you're investing in affects the outside world the idea was that you take es factors into consideration when you look at a stock or a

bond or an asset but that morphed in people's minds to thinking that ESG is a measure of a company's goodness does it do the right thing by the environment does it have a nice culture is its governance any good and if I buy a company with a good ESG score I'm buying a good company that is nonsense ESG is not about doing good it's about being a long-term sensible investor if you're a long-term shareholder and you care about financial returns you need to care about the climate as well because the climate effect for instance on

inflation is stronger than it's ever been before we see it in in harvests we see it in reinsurance U premiums you need to care about uh executive pay because you want to have a sustainable uh situation you need to care about diversity at board level because those boards with better diversity generally perform better what does climate have to do with like labor laws in a certain country you know or diversity and inclusion so an alert system morphed into an investment strategy those are two very different concepts one is risk management the other one is positive

impact if something has an ESG label on it my mom will think it must be full of good companies no I might go into a client and show them a company that they think is bad they'll go you've got an oil company or an airline or a cement company in your portfolio it's got a low ESG score why is that and I'll say well it's so cheap that it takes those risks into consideration and we think it's an attractive investment I'm using definition one they are using definition two and we don't understand each other and

that is a fundamental problem that is still around in the industry was sort of Smashing together a bunch of things that are unrelated so that you can have a very simple single indicator of virtue while minimizing tracking error you know against an index and the goal is ultimately if you could figure out how to take your product and make a few changes such that the return Dynamics are the same or very similar but you have a slightly Greener basket right which might just mean as we saw you know underweighting fossil fuel players and then overweighting

tech companies and what Wall Street played on dressing up riskmanagement products on well-run companies investors were thinking they were investing in portfolios that were offering environmental and social benefits that wasn't the case at all our final suspect is Stuart Kirk Stuart Kirk worked as an ft journalist and then went on to work as the head of responsible investing at HSBC asset management and he was in that role when he came to give a short speech at an ft moral money conference in London Sharon said we are not going to survive and indeed no one ran

from the room in fact most of you barely looked up from your mobile phones at the prospect of nons survival the Sharons and the mares of this world need to tell us why prices are going up with our own demise I was in the room when he made that presentation it did go down like a cup of cold sick he did open up a conver ation around the in inconsistencies that are inherent in ESG that that wasn't previously there so he has to take a share of the blame here I'm afraid and I don't think

he imagined that it would gain quite as much momentum as it did or lose him his job to be suspended straight away is discombobulating I still have not to this day spoken to any of my colleagues horrendously stressful for anyone who does this for a living anyone who's got four children anyone who's got a sensible job and has tried to work hard and do the best they can for their employer which I've always done now I've been through a lot of bubbles do bubbles emerging market bubbles you could always say stocks were overvalued I think

this is nonsense here's another Viewpoint and you would debate it within a firm never in my life have I been in a bubble where you could not critique it at all with risk of losing your job if my sacrifice was worth anything it was allowing people for the first time to voice legitimate and necessary criticisms of something which needed to be open um and I know that from the thousands of emails I got from people saying I was also fired for making a mild criticism of ESG over the past two or 300 years Global growth

Global development exploded based on a fossil fuel Foundation we've now realized that fossil fuels are cooking the planet and we have to move as rapidly as possible to the post fossil fuel age that's the future enormous fortunes will be won and lost as part of this we need to create new lowcar carbon performance benchmarks and that requires a complete rethink by pension fund trustees to reflect this world that we need to build instead of reflecting the world that we're trying to exit what has gone out of fashion is the term ESG and maybe that's a

good thing this shouldn't be a party we're not talking about a party or not a party we are talking about the future of a humankind a lot of the same financial institutions that are telling us to rely on ESG are active behind the scenes taking advantage of you know traceless and and often Limitless political spending to influence policymaking we will not be speaking out ESG anymore 5 10 years from now and that is because sustainability will be embedded in how we invest what I call option one ESG as an input will just melt into the

existing investment process and will just disappear cuz everyone will realize we should all be doing that anyway the exciting thing will turn to the the goodness scores and funds will be properly labeled and they'll have a big thing on the top saying this goodness may affect your returns and someone will go you know what I don't mind 4 and a half% instead of six and they will choose those funds legitimately and everyone will be happy for anybody to think or say that ESG is dead that ESG is not going anywhere that it was just a

label that is just a political philosophy I'm sorry to say they're all wrong we think ESG is about as political as gravity it's not political it's about thinking longterm and it's about thinking about your returns this is the death now for fossil fuels and people holding oil and gas thinking that they this is a long-term growth opportunity they're going to be get caught short the majority of gen Z and Millennials don't believe in capitalism leaders of that system stand up on a stage and they say we know these are big problems climate change is critical

we have to solve them and they talk about ESG and stakeholder capitalism and every single year those young kids who again they didn't learn you know climate change is real because they watch a documentary years after they left school they learned it like we learned Newton and gravity right so they know it's real they see the leaders of the system say oh it's really important we're going to do something about this and every single year profits keep going up and the scientists tell us that we're getting further and further behind there's a significant concern I

have that we'll see political stability as people try to overthrow the economic system long before we actually get to 2050 right and see if Net Zero actually plays out there is money to be made from the green transition it makes perfect sense to put my pension money and yours into green technologies that are going to be used all over the world and that are essential if we're going to get ourselves out of this climate hole what's important is that serious work is done to really grapple with the challenges and the opportunities that we face and

those who do it right will be surfing the wave of the single biggest economic transformation and one of the biggest opportunities in the whole history of human civilization [Music] [Music]