We held our second Linchpin Salon discussion in the spectacular Council Room at King’s College, London, under the watchful eye of the Duke of Wellington and a curious clock. The subject was ‘ESG and the Cancel Culture’. It is a topical subject and we were able to assemble an illustrious panel, as our record audience of 75 (in person and hybrid) demonstrated.
The session was hosted by Aoifinn Devitt, and the panellists were:
Jason Mitchell, Head of Responsible Investments, MAN Group
Ned Whitehead, Director, Sustainable Investments, Redington
Tom Gosling, London Business School
Luba Nikulina, Chief Strategy Officer, IFM Investors
Objective of the round table
While ESG investing and risk factors have entered the mainstream - what manager does not at least consider climate change when selecting stocks? Over recent years substantial challenges to the concept from different directions have arisen. We wanted to explore the future for ESG investing.
Has ESG investing reached a peak?
The first question posed was whether ESG investing has reached its peak. The panel suggested that some areas are in rude health: e.g., ESG factors are accepted as part of risk management and many asset managers are comfortable with aligning their investments with their values. One major challenge is whether there has been any real impact in the world. Here the problems have been ‘over-claiming’ what ESG can do, and political over-reach based on less than rigorous academic studies. Both have led to failures of credibility.
Problems with ESG data and lazy thinking
The problems of data were also dissected. Availability varies between the private and public sectors, and it is a well-known problem that correlations between different ratings providers can be low, especially if scores try to encapsulate a complex and subjective judgement in a single number. Bundling E, S, and G together is unhelpful in this context, and the panel preferred the concept of sustainability. There was a clear view that a prescriptive data framework is needed to make comparisons easier. But there also needs to be the ability to adjust for different industries.
A constant trope in the discussion was the danger of lazy thinking. This came up in areas such as definitions, data scoring, stewardship and engagement, and trustees’ decision-making. We touched on the problems of managers’ cherry-picking the best examples when pitching on engagement, the over-commoditisation of ESG data and ratings. But the panel also saw this as an opportunity to sharpen up thinking, especially on how to use data and improve communication to wider stakeholders.
Can fiduciary duty include climate change considerations?
Perhaps the thorniest problem is alignment with fiduciary duty. This led to a considerable debate. One challenge came from the need to demonstrate ‘proof of concept’ i.e., that it had any real effect on the planet. The riposte from the panel was to ask what would constitute qualifying evidence and suggest that we had to choose between three largely exclusive objectives: decarbonisation, energy security, and price affordability.
Generally, the panel believed that for longer term investors looking out across multi-generations there is a good case for saying that fiduciary duty does include consideration of climate change. Some saw it as an existential matter and one panel member argued there is a direct conflict between the current exploitative system and future generations. Trustees can therefore justify applying their judgement to go beyond financial returns, but only if they are thoughtful about the financial consequences on their beneficiaries.
The discussion also touched on the disconnect between the efforts and resources put in by the financial sector and the lack of positive impact. Quite apart from the cost to the investor, it can even have a negative effect because it reduces bandwidth to think.
The backlash against ESG
We discussed the reasons for the backlash against ESG. Political opportunism is an obvious cause, sometimes given fuel by lazy data or research, and the panel emphasised the need for academic rigour. The lack of connection so far between financial returns and sustainability, especially in the last three years, is a second factor, and green-washing i.e., using ESG as a marketing tool, a third.
Although ‘doing good’ has not always led to ‘doing well’, the panel suggested that was more a problem of Trustee decision-making and portfolio construction than a failure of ESG itself. One panellist commented that it is not only returns which have suffered, but signatories to PRI have fallen substantially. He used this to argue that there is a wider credibility issue with ESG, and that is not just down to poor recent performance from listed equiities.
Impact of politics and the cancel culture
We moved on to politics and the impact of Government actions. One panellist believed that the Inflation Reduction Act has been the single most effective piece of climate change action, because it has substantially changed behaviour. Investors’ support for such initiatives gives governments some comfort in the face of opposition from other quarters.
The panel generally agreed that governments have to be part of the solution, though one argued that more legislation was not needed, on the basis that we already have the means to achieve climate change. We need the politics to align, and that means finding ways to include stakeholders such as pensioners who are outside the financial and political elite.
This would also help defuse the cancel culture, although we noted this comes not just from political opportunists; it can also be because climate change views in the United States are so very different from elsewhere in the world.
Collaboration and universal ownership
We ended the discussion by looking forward. One audience member advocated the concept of universal ownership where the assets of any company ‘belong’ to the world, and not just the shareholders. But engagement with a company to change its behaviour takes time, needs to be on many levels, and cannot be standardised if it is to be effective.
We also looked at innovation. Generally, the panel believed the current framework of political decision-making can work, but the problem is that any transition is bound to be disruptive and therefore politically difficult. Market pricing would be the easy way to make choices over climate change matters, but it is politically unacceptable.
The panel was sceptical about innovation in the financial sector, believing it had the potential to cause more complexity than benefit. One panellist commented that financial returns are not necessarily correlated with the planet’s health and we need a better bridge between science and the financial sector.
Collaboration and anti-trust law
An audience question about collaboration led to a discussion. There was a suggestion that the golden age of collaboration is over, and a panellist pointed out the difficulty of collaborating and competing. Anti-trust law is a major problem in the United States, and collaboration is probably best done in the context of engagement with governments.
Finally, an audience member commented that there is always a backlash when governments try and force action, and they could do more to persuade. For example, an argument might be that excess revenue from fossil fuel companies frequently ends up by debilitating and corrupting countries – Venezuela being just one example of many given.
Bibliography
Diversity
Andreas Hoepner paper published in the European Journal of Finance which empirically demonstrates that boards with higher diversity, for reasons other than Corporate Social Irresponsibility (CSI), were significantly better than their lower diversity counterparts in reducing CSI incidents once encountering them. This effect is economically stronger for diversity unrelated to CSI than for overall diversity. The sample consists of 2,880 US firms between 2007 and 2016. Full paper here: 'Women on boards and corporate social irresponsibility: evidence from a Granger style reverse causality minimisation procedure'.
Or this one in the Journal of Corporate Finance showing that the presence of women on boards increases firms' environmental and social (E&S) performance, using the natural experiment created by France's 2011 board gender quota law.
ESG
Recent Harvard Business Review article on unbundling ESG
Papers by Alex Edmans (Professor, London Business School), who was referred to in the discussion.
Aggregate Confusion: The Complexity of ESG Ratings Berg, Kolbel, Rigiton (MIT, 2019).
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