Even if the Dow fails at 30,000 ESG is here to stay
ESG is not a fad but a fundamental realignment, and one which will survive any fireworks which might be around the corner for global equity markets
THIS year is likely to go down in the history of the capital markets as the one in which ESG came of age. The dial from pure, unbridled, profit-focused capitalism has been moving seemingly inexorably towards a different model as it passes over significant milestones.
It was not just Greta Thunberg angrily addressing the United Nations after travelling to New York across the Atlantic on an energy-efficient yacht late last year and in the process super-charging the global consciousness towards climate change. Nor was it the Australian bushfires which raged as the year came to a close in an unwelcome but raw segue to Ms Thunberg’s breathless rhetoric.
More materially from the perspective of the existing capitalist model it was the US Business Roundtable proclaiming in August that its members should run their companies in the interests not of shareholders but stakeholders.
And it was BlackRock, the world’s largest asset manager declaring in January that its investment decisions would be made with environmental sustainability as a core goal as its boss Larry Fink stated in his annual letter to CEOs that “society is increasingly looking to companies, both public and private, to address pressing social and economic issues”.
Meanwhile at the end of the month it was the US Federal Reserve Chairman Jerome Powell stating he plans to bring the Fed into an alliance with central bank peers and global regulators in the Network for Greening the Financial System which aims to align policy with the Paris climate agreement goals, even though Donald Trump, in one of his first acts as President, was to withdraw the US from that agreement.
That the accumulation of forces which have built the ESG “complex” to its emerging explicit maturity in little more than a decade are combining as the Dow Jones Industrial Average hovers close to an all-time - and powerfully symbolic - high of 30,000 is significant and will remain so whatever the unfolding financial asset price action.
One school of thought has it that ESG investing is simply a faddish “fashion item” that in the face of the surge of investment in passive funds, the ESG label is just a marketing gimmick to allow active managers to attract new money.
Whatever the reality of the underlying dynamic, there is no doubting the reality of the bid: over the past year ESG-focused equity funds have pulled in US$70 billion, while conventional equity funds have been deserted to the tune of US$200 billion over the same period, according to EFPR data.
I would not dispute the fact that the ESG arena is beset by an array of complexities and seeming contradictions. That two companies in the same industrial sector can have identical credit scores based on financial metrics but divergent ESG scores to the extent the difference can be arbitraged is one glaring example.
Nor that rafts of companies “greenwash” by spuriously claiming credentials in the sustainability stakes in order to attract capital. Or that ESG data diverges bewilderingly across countries and industries to the extent that making meaningful comparisons - or even a simple decision about which boxes a single company ticks regarding ESG metrics - is deeply problematic.
To return to the Dow at 30,000: one school of thought has it that should the market fail around that level - for whatever reason, be it a novel coronavirus-induced recession or the conclusion of the current prolonged business cycle - then ESG investing will be pushed aside as the luxury item it always was.
I would argue the opposite case and suggest that a major equity market correction will actually push the ESG dial further. A core argument of the ESG movement is that equity prices are erroneously correlated with short-term results.
This thinking pervades the corporate mindset and contributes to a form of delinquency in the pursuit of looking good for the analysts’ quarterly earnings call. It flies in the face of the sentiments expressed above by Mr Fink and the stance adopted by the BRT and the central bank consortium.
A major equity market correction while the ESG dial refuses to move back will prompt a wave of corporate soul searching. Cynics suggest that in the process, CEOs will be able to “hide” poor performance behind the recalibration of their companies towards ESG.
So be it, but it will begin not to matter; the fundamental issue of just what a company is, or should be, is being profoundly rethought before our eyes, as is the discipline of investing. ESG is not a fad but a fundamental realignment. And one which will survive any fireworks which might be around the corner for global equity markets.
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