The Debate Over ESG Investing: Lots of Hot Air

Phil Glynn

Originally published September 8, 2022 in The Hill

As climate scientists analyze the boiling summer of 2022, I’ll eagerly await their findings. How much can we attribute to increased fossil fuel use caused by the economic recovery? And how much can we attribute to the record levels of hot air being spewed by reactionary conservative politicians about environmental, social and governance (ESG) investing?

This summer, Texas began implementing a law requiring state pension funds to divest from firms its comptroller views as hostile to the fossil fuel industry. Setting aside the merits of this policy, its botched rollout provided exactly the kind of regulatory uncertainty that capitalists from both parties agree really kills jobs.

Meanwhile, Florida’s Republican governor led a resolution to prevent state pension funds from considering ESG factors in investment decisions. I wonder how this was received by the 14,900 employees of Florida-based energy giant NextEra, which has its 2022 ESG report and promise of a “real plan for zero” front and center on its website.

ESG investing is hard to define. But, in general, it places other priorities—reducing inequality or increasing diversity, for example—on equal footing with financial returns. In recent years, ESG has been closely identified in the public mind with the fight against global warming. If you have been living under a rock for the past 10 years, first of all, congratulations on your super low-carbon lifestyle. Second, you might ask: Why is this even a category? Doesn’t any business decision include factors other than pure financial returns?

Earlier this year, HSBC’s Stuart Kirk gave a now infamous speech “Why Investors Need Not Worry About Climate Risk” at an ESG conference.

Kirk, then the head of responsible investment and research at the bank, complained about the amount of work involved in calculating climate risk. His take on the climate crisis’ predicted hit to GDP growth was “who cares?” He cited the average loan term at his bank (six years) and said, “what happens to the planet in year seven is actually irrelevant to our loan book.”

Unsurprisingly, he was soon relieved of his duties at HSBC. Last week he resurfaced in the pages of the Financial Times with a fascinating editorial.

Kirk’s criticisms, however, shed light on a paradox at the heart of ESG.

Most of the people whose job it is to raise and invest money under the ESG label are “input” focused. That means they take ESG factors into account when making investment decisions with the ultimate goal of risk-adjusted returns. Most of their clients, however, are “output” focused. That means they expect an ESG fund that touts its green credentials to completely eschew fossil fuel stocks and steer capital into renewable energy companies.

Some, like Kirk, suggest that regulators and practitioners split ESG in two along this input/output axis. They argue this would bring greater clarity to the industry and allow ESG to reach its potential.

I work in the field of sustainable and responsible business. I am the president of a certified B Corporation and a Ph.D. candidate in the field of sustainability. When I speak to my clients, their priority is always on output. They ask: How can the financial products and professional services you provide help me build more affordable housing and create more jobs in my community?

As an output-focused investor, I admit I’m probably oversimplifying the very hard task facing my input-focused fund managers. The job of an ESG manager sounds very difficult. In fact, it is hard to be in any relationship when the other partner has difficulty articulating what they want.

Here is what I want: I want the market value of the companies that are heavily invested in resolving the climate crisis to grow. I want them to have access to the capital they need to hire the smartest people in the world, to invest in the best technology and to communicate to their customers and communities about how to use it as effectively as possible. I do not want to be an owner of a company—remember, that is what investors are—that is heavily invested in making our problems worse.

But here is what I want even more: I want reactionary conservative politicians to dispense with the easy political stunts and engage with the hard work required to lead us out of this crisis. Because at the end of the day, investment choices and consumer decisions—even in the billions of dollars—are no substitute for sound public policy. I want leaders to use incentives and constraints to fundamentally change the world markets in which fund managers invest my money. And, ultimately, I want ESG to become meaningless—not because it suffers from the lack of definition, but because based on changes in policy and culture we will have moved sustainability to the center of all business decisions.