ESG has been under the microscope for the past 12 months with pressure from some Republican politicians in the U.S. who have called for investment managers to pull their clients’ money from ESG-focused investments.
Simplistically, their argument is that ESG prevents investors being able to access assets like fossil fuels and, by doing so, they will have missed out on soaring fossil fuel company valuations driven by rising energy prices. Those on the anti-ESG side argue that continuing to follow ESG doctrine in today’s market is therefore a failure of fiduciary duty by investment managers.
This of course overlooks one rather fundamental challenge: The Intergovernmental Panel on Climate Change (IPCC) in its recent AR6 report stated that the G7 economies needed to hit net zero by 2040, not 2050, if we are to avoid catastrophic climate change.
At the 2021 United Nations Climate Change Conference, countries pledged to scale down their use of oil and fossil fuels. The latest scientific evaluation from the IPCC sets the scene for a future climate change conference (not too far in the future) making the pledge to scale out fossil fuels and accelerate the already significant investment into an electrified and decarbonized future.
Whether you believe in ESG or subscribe to the “woke capitalism” viewpoint, it simply can’t be ignored.
So the fiduciary duty of investment managers when seen through that lens would suggest a long-term imperative to ensure that the funds they manage are not placed into assets that will become stranded or obsolete. In other words, investing using ESG metrics and favoring renewable and climate tech type investments makes economic and investment sense in the long term.
This approach is one that we follow, and we’re not alone. Despite recent controversy, the ESG investment market is estimated to be worth $53 trillion globally by 2025 and data, reported by Bloomberg, from the European Fund and Asset Management Association (EFAMA) has shown that the EU’s highest environmental, social and governance classification, known as Article 9, drew in €26 billion ($28 billion) in 2022. That coincided with bond funds seeing client outflows that were greater than since the global financial crisis in 2008, while equity funds also suffered, losing €72 billion over the same period.