If things continue like the past few weeks, it may be a little tough to prove the case for ESG investing based on stock market returns this year. So that shifts the emphasis to the question of whether ESG investors are producing real world outcomes. What kind of report card will scientists, rather than Wall Street, give them?The United Nations-backed Principles for Responsible Investing late last year published a think piece on investor engagement with companies, saying it hoped investors would push executives to address societal outcomes rather than inputs and processes. “Stewardship is the way investors can have influence,” PRI’s Paul Chandler said at the time. “But we’re not convinced the aggregate effect of all that stewardship is delivering enough impact on the systemic risks we face.”ESG investors have been eager to show the impact they’re having on companies. More investors are publishing engagement reports that detail the difference they’ve made on issues from climate to diversity to gun policies. Goldman Sachs said this week that it wants to use its power to push for a woman director at every public company in its portfolio. Legal & General Investment Management plans to target its activism specifically around methane gas leaks. State Street even bragged that, since it placed its Fearless Girl statue on Wall Street three years ago, 681 companies have added women directors to all-male boards (though a connection may arguably be tenuous).
But this push for investors to get specific outcomes isn’t universally shared. Norway’s sovereign wealth fund, an ESG trailblazer, says it’s not so sure about outcomes reporting. “Attributing the impact of companies to investors across strategies, asset classes and investor types is challenging,” the fund wrote in a letter to the PRI last week. Minority investors really only have a marginal influence on a company’s funding cost and strategic direction, the fund said, and investors can’t really get that involved in operating decisions. The job of an investor is to focus on maximizing financial returns, not necessarily impact, the fund argued. Despite this skepticism, ESG investors have produced some tangible outcomes. Norway’s decision to divest oil explorer stocks sent shockwaves through the market last year. Given Saudi Arabia’s declaration of an oil price war on Russia, the move now looks prescient.
And on the climate side, investors have become more cognizant of whether companies are aligned with a 2 degree Celsius global warming scenario. As a result, they’ve been compelling more reductions in emissions across the spectrum of company activity. There are now 827 companies that have set science-based targets to help them figure out their specific contribution to emissions-reduction goals. That’s up from 630 companies as recently as September.
Still, the total impact of corporate energy efficiency, electric vehicle adoption and emission tonnage reductions hasn’t been that significant, said Paula Diperna, a senior adviser at the Carbon Disclosure Project, at an event in New York last week.
“At the end of the day, if the client is the atmosphere, the tonnage reductions are not what we need to meet the Paris Agreement,” DiPerna said. More aggressive carbon pricing and technological development will be needed to have a real impact, she said.
Soon, people will be asking what actual good is being accomplished by ESG investing. Right now, it could look like a lot of greenwashing.
Sustainable Finance In Brief
- ESG data spending is rising about 20% per year as asset managers rely more on ESG ratings and indexes.
- For active managers, ESG strategies are part of a survival plan.
- The European Union released its final taxonomy for sustainable finance. The European Commission must turn it into law by 2021, with some difficult decisions along the way—including whether to shut the door on nuclear power.
- Amazon nixed a green shipping idea to avoid annoying shoppers.
- Toyota says investors are driving the green bond market.
Emily Chasan writes the Good Business newsletter about climate-conscious investors and the frontiers of sustainability.
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