ESG Honestly
Posted 21 March 2024
ESG: No such thing as bad press?
ESG investing provokes some strong reactions, to put it lightly. A quick search for “ESG controversy” reveals more articles about why the style of investing itself is controversial than it does about investments which are controversial for ESG reasons. The backlash is most pronounced in the US, where Republican lawmakers have repeatedly tried to ban the managers of public investments from considering environmental, social or governance factors when making investment decisions.
In March of 2023, both houses of the US Congress voted to overturn President Biden’s decision to let pension fiduciaries take ESG considerations into account. Biden in turn vetoed the legislation, but Republican-controlled state legislatures have been fighting it in the courts ever since. On the American right-wing, ESG is considered the corporate version of “woke”. Former Republican presidential candidate Vivek Ramaswamy made fighting ESG investments a cornerstone of his campaign.
The situation is less politically charged on this side of the Atlantic. Few in Europe and the UK are explicitly against ESG investments’ purported goals, but there are still controversies. ESG criticism mostly centres on the effectiveness – or lack thereof – for helping goals like environmental sustainability. The notion of “greenwashing” – falsely advertising investments as eco-friendly – has garnered a lot of press, and new regulation has been introduced in response.
The effect on ESG investments
The impact on ESG investment products in recent years rebuts the old notion that there is ‘no such thing as bad press’. Reputational damage is undeniably bad for companies and their stock prices. Volkswagen lost more than 20% of its share value in the days after its 2014 diesel emissions scandal. And according to a 2023 report in the Journal of Cleaner Production, companies facing ESG scandals are likely to suffer from investment inefficiencies or external funding problems.
Negative stories about the broader ESG space weigh on the sector too. Last June, BlackRock CEO Larry Fink said he had stopped using the term ESG because it was now too politicised. The company’s ESG commitments were supposed to be unaffected by the terminology shift, but BlackRock has been rejecting more environmental and social shareholder proposals since. The Vanguard Group is doing the same, with reports last year that it only approved 2% of environmental and social resolutions, down from 12% in 2022.
A recent report from ESSEC Business School researchers showed that environmentally-focused funds usually take a significant hit from greenwashing scandals and political controversy around ESG. In the month following some bad press, institutional investors take an average of 8% out of green funds, while retail investors take out 12.6%.
An exaggerated problem?
Investors might pull out of scandal-ridden companies for financial as much as moral reasons. Volkswagen had to pay billions in fines across jurisdictions for the diesel scandal, and more recently, Deutsche Bank subsidiary was fined $19 million in the US for ESG reporting failures. But when investors pull out of the sector as a whole on the back of bad press, there is probably a fair amount of disillusionment at play.
Most ESG buyers are in the space because they want their investments to reflect their values. But stories about widespread greenwashing can make that goal feel a little hopeless. And when you combine that feeling with the polarised politics and stories about how ESG investing could lose you money, it is no surprise if investors start to feel that ESG has a zero or even negative affect.
However, that would be a big exaggeration. Plenty of research has shown that explicit ESG goals and clear implementation procedures tend to improve companies’ sustainability, and a proactive approach has been shown to make organisations more resilient to crises like climate change.
The real prevalence of greenwashing is a contentious issue, as is the way to solve it. But sometimes hidden in this critique is the suggestion that ESG investment should be abandoned or suppressed altogether, which is surely more contentious. For example, many of the legal challenges to ESG in the US have been brought by oil and gas companies, or lawmakers from fuel-producing states.
New regulation could help
In any case, new regulations on ESG reporting and implementations should help. Here in the UK, the new Sustainable Disclosure Requirements (SDR) make much clearer the sorts of investments which can count as environmentally friendly. The SDR replaces vaguer labels that did not distinguish between activist funds trying to implement green procedures and funds that simply screened off self-reported polluters, for example. The EU’s new labelling rules do something similar, making ESG investment assessments clearer and more consistent.
Neither are perfect, of course, but both at least aim for transparency and consistency. This helps funds and companies themselves, as they can know which procedures they should follow to qualify for ESG investment. And in time, it will hopefully help consumers by giving them the tools to check whether investments align with their own values, and the confidence to trust those tools work. Building that confidence will take time, but hopefully investors will see the worth in it.