“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality is distorted by a misconception.”
– George Soros
Today we begin the saga of ESG investing. Yesterday, we left off with reader mail wondering why we were delving into this topic… I believe our reader’s reply was “very disappointed”.
Well, here’s a quick introduction as to why.
ESG = Environmental, Social and Governance.
It’s the brainchild of a UN commission in October 2005: the “United Nations Environment Program Initiative in the Freshfields Report.
Since inception, the term was mentioned in 1% of the earnings calls. Meaning, there was not a lot of interest in using the metric as a way of determining whether a company fits the nebulous criteria of what makes good environmental, social or governance practices.
Enter Klaus Schwab, founder and chairman of the World Economic Forum and Larry Fink of BlackRock, a hedge fund with $11 trillion under management. Throw in Vanguard, who has also adopted ESG guidelines, and you’ve got somewhere around $18 trillion committed.
As we’ve also mentioned more than a few times at COP26, Mark Carney, the chair of Glasgow Financial Alliance for Net Zero (GFANZ) raised $130 trillion for their goal of net zero carbon emissions 2050. Money like that goes a long way on Wall Street and through the halls of power.
Since 2019, then rapidly increasing in 2020 throughout the pandemic, the numbers of mentions of ESG during earnings calls, up to nearly 25%. The following chart is from the Financial Times:
Rise in interest in ESG metrics among investment funds since 2019 source: FT
“ESG is more of an issue in Europe and Asia, I find,” says John Englander during our Session this week. “Some investment houses in Hong Kong and London had me give presentations to their analysts about sea level rise as an ESG issue. So, that’s how I got exposed to it.”
Another chart from the FT bears Mr. Englander’s observation out:
ESG Investment funds are rising faster in Europe than elsewhere in the world. Source FT
We can hear half of our readers groan. We hear you, there is ample scientific proof that climate change is just that. “It’s simple really,” reader Jeff, “the climate is changing. It has always changed. It will always be in a state of change. ‘Man will adapt if he is free to do so,’ wrote Hobbes in Leviathan, ‘If he is not free to do so, he’ll live a life that will be nasty, brutish, and short’.”
“A typical advertisement for ESG funds will read like this,” writes Thoe Vermaelen, a French professor, in response to the FT article. “Investors in the fund will (1) reduce global warming and (2) do this without giving up returns.”
“The first part of this statement is an obvious lie,” Theo continues:
The typical ESG fund gives no money to the companies in their portfolio. The funds exploit the apparent ignorance of many investors who believe that if they invest in, for example, the “Wind Energy Fund” they actually give money to the firms in the fund to produce wind energy. Nothing is further from the truth. The money invested in the fund is used to buy shares from other investors who sell their wind energy shares.
Monsieur Vermaelen goes on to show the claim made by these funds that as the green stocks become more dominant the cost of capital will drop and cannot be good for the investor. “As a lower cost of capital translates into a lower expected return on equity it means the claim that investors in ESG funds won’t give up returns is false as well.”
“Because of course the complication of the war in Russia, or in Ukraine,” says John Englander, “Rather the issues about Russian energy, which are causing companies and countries to look at fossil fuels with a fresh eye because of the problem of supplying the world with enough energy.”
Reminiscent of brick mortar companies tacking a .com onto their names in the early 2000s to get in on the tech boom, the FT piece is critical also of companies and funds who are “greenwashing” themselves to get a little piece of today’s investment trend du jour.
So it goes…
Founder, The Wiggin Sessions
P.S. In response to the energy challenges in Europe right now – especially in Germany, even Larry Fink with BlackRock says of ESG, “Maybe we overstepped it a little bit.”
Check out our Wiggin Session with John Englander, here.
P.S. de resistance: Here are the recommendations our team sent today.