Which ESG conversation are you having?
September 28, 2022
ESG has been leading a double life. On one hand, an oil-slick language of environmentalism and ethics, now tripping off every tongue in finance. On the other, Big ESG: the Big Finance spin-out created, not to benefit the environment, or society, but to assess, and ultimately dodge, the exposure created by environmental, societal and governmental catastrophe.
The problem: Most investors assume they’re buying the former – that their social ethics, their environmentalism, is what they’re investing in when they buy ESG stocks. The bigger problem: decarbonisation depends on the truth of this assumption. By Stuart Kirkby’s recent FT analysis, this is a mismatch of two legitimate conversations: ESG-outputs vs ESG-inputs. The problem, he argues, is not duplicity. It’s misalignment.
To the problem set, one could add: silence. The best lies are always an act of mutual myth making. And so Big Finance, under the cover of Big ESG, has continued its governing logic, uninterrupted. Investors, thrilled by the surprising range and performance of ‘green stocks’ (still yielding short-term returns) have either declined to ask too many questions or succumbed to deliberately opaque fund structures.
Whether, like Kirkby, you see a misaligned set of assumptions, or – like the avalanche of whistleblowers now emerging from the inner sanctum Big ESG – a deliberate hoodwinking, is, in the end, irrelevant. The mutual myth is defunct. ESG isn’t fixing anything. In the false reassurance it offers engaged stakeholders and complacent governments, it may even be making it worse.
See how, in the same year that McDonald’s emitted 54 million tonnes of greenhouse gases (more than either Portugal or Hungary – and an increase of 7% in just 4 years), its ESG rating was improved – because carbon emissions were dropped from its ESG calculation (deemed, by MSCI, to no longer pose an immediate threat to its business model?).
This is a dangerous moment for the world, and a troubling moment for investors seeking to do good, not just mitigate harm, through the private capital they wield. In achieving this end, there is rarely such a thing as a simple investment decision.
Tesla – one of the world’s most progressive companies, explicitly dedicated to calling out the ESG mismatch in its own annual reports – shows that even when the story is patently good; patently striving for change; the picture is complex. The electrical transition relies on lithium, cobalt and nickel – minerals rife with supply chain instability and acute human costs. Yet no complexity is more pressing to deal with on a global scale.
Time has been advising clients about the human costs of energy since 2016, when we first documented the Democratic Republic of the Congo’s perilous ‘artisanal mining’ practices feeding the world’s rampant demand for cobalt. Far Away from the mines, US-based factories making batteries and green tech products, including Tesla’s own, continue to make headlines for abusive working practices. (Tesla’s 2021 impact report enshrines the need for worker protections, while it combats multiple employee lawsuits against alleged racism.)
Time Partners, together with Sir Ronnie Cohen and others, has spent decades forging an authentic language of impact. Impact, defined by real world measures and a relentlessly holistic view which spans every layer of the stakeholder economy. This worldview is organised in the External Rate of Return, or ERR, developed with the London School of Economics, with which we guide holistic investment strategies. It is patently clear, to anyone seeking long-term returns, that riches must mutually enrich. People, Planet, Profit. An ERR outlook allows us to balance difficult realities, not deny them, and invite stakeholders to independently sense-check corporate claims on ethical practices, thus creating, over time, a transparent and publicly accountable corporate culture.
Time is privileged to work with families and institutions who understand and invest capital as an intergenerational duty to the stakeholder economy. We are committed to continuing to guide them with a long term view and a wide lens rooted in the ERR and the language, always, of meaningful impact.