Originially published 01.20.2020
ESG stands for Environmental, Social and Governance factors which are integrated into investment analysis in an effort to provide investors with long term performance advantages. ESG is about economic value and has recently emerged as an alternative to SRI (Socially Responsible Investing) which incorporates ethics and social concerns to bring about changes that resonated with individual investors. The original form of SRI focused on exclusion or “negative screening”, allowing investors to reject companies they disliked for ethical and values-based reasons.
The movement from SRI to ESG investing was driven by investors’ desire to maximize value whilst deliberately including and investing in innovative companies working to solve social problems. The development of SRI had some proponents relabeling the acronym to “Sustainable, Responsible and Impact” investing, prior to the rise of ESG.
Although ESG metrics have yet to become part of mandatory financial reporting, companies are increasingly disclosing their efforts through “sustainability” reports. An annual risk survey of business and political leaders, recently published ahead of the World Economic Forum (WEF) to be held in Davos 21-24 January 2020, ranked climate-change-related threats as the top risk facing the world. Borge Brende, president of the WEF stated, regarding climate change, that “the cost of inaction far exceeds the cost of action.” One of the top concerns was cited as “domestic political polarization”, identified as a barrier to effective climate action to transition to a greener, low-carbon and more sustainable economy, which is now an “existential challenge for everyone on this planet.”
No less a “person of the year 2019”, Greta Thunberg, will be attending the WEF in Davos and one might hope for another acrimonious interaction between her and the President of the USA, Donald Trump, following the pair crossing paths at the UN Climate Change summit in New York last year! So … OK Boomer, are we about to be led by Young Climate Change Activists such as Greta? Or will her plea to end the fossil fuel economy now “I want you to panic” be forgotten in a similar manner to the demise of the Occupy Wall Street Movement?
So far, it appears that some of the most powerful Index Fund leaders are taking ESG seriously and are bringing to market a number of exchange traded funds (ETFs) that choose and weigh their investments based on ESG criteria. BlackRock Inc., the world’s largest money manager with over US$7 Trillion of assets under management (yes folks that is Trillion), is led by Larry Fink, a billionaire ranked as #28 on the 2018 Forbes list of The World’s Most Powerful People. Fink recently warned company boards to step up efforts to address climate change, whilst forecasting a “fundamental reshaping of finance”. To this end, BlackRock indicated that it intends to increase its offerings of ESG ETFs to 150 over the next few years and specifically add some that would screen out fossil fuel companies! Fink, however, hedged his bets somewhat by allowing that the transition to a low carbon economy will take decades, and that BlackRock will continue to hold exposures to the hydrocarbon economy as the transition advances.
On the individual Corporate level, such companies as Microsoft and Amazon have both announced plans pledging to be net zero carbon by 2030 and 2040 respectively. Microsoft has committed to invest US$1 Billion into carbon reduction and removal technologies, including support for Carbon Engineering, a British Columbia-based developer of Direct Air Capture technology that removes carbon dioxide directly from the atmosphere.