The ongoing debate around ESG investment is on the radar of JB Beckett (pictured) this month. In his latest blog for IFA Magazine, JB reassesses ESG strategies amidst current criticism – and how it all poses something of a dilemma for advisers.
To the adviser…
As an adviser you have advised your clients through multiple market cycles, volatility, geopolitical risk, inflation and market uncertainty. You practice and value the power of advice and consultation. As an adviser you have also witnessed the rise of Environmental Social Governance (ESG) in your own compliance and the products you advise on. In turn you have also witnessed the subsequent burning of ESG in the press. In light of which one poses, at any point were you advised or consulted on ESG?
From Momentum to Ashes: The Rise and Fall of ESG Optimism
Once upon a time there was great momentum when it came to ESG. The political push accelerated and data vendors moved quickly to demonstrate that investing more responsibly was productive. Recall, around the time of the Net Zero Alliance and COP26 there was a rising level of optimism. That optimism now burns, as embers, having been thrown on a US-led bonfire.
What then for ESG in the U.K.? Should it be burned as some suggest and should advisers care? No and very much yes.
The Green Rush: Profit, Policy, and the Net Zero Obsession
The industry too rejoiced, as it could capitalise on the shift towards responsible investing that unsettled entrenched markets and boosted competition as everyone raced towards green. Reverse engineered data studies provided efficacy and validation that good could equate to better returns and everyone cried ‘huzzah’. Increased political focus revolved around a relatively narrow bound of carbon reduction to the sake of wider climatic, biodiversity and ESG issues. ‘Net Zero’ initially helped to create gravity around ESG but then at some point appeared to subsume it in the media, political class and industry, as ESG was consumed by this virtuous-signalled singularity it had spawned.
The ESG Hangover: Greenwashing, Whistleblowers, and Industry Fatigue
Then the post-COP party ESG hangover began. It started with growing criticism and shaming of greenwashing. Then Desiree Fixler blew the whistle on DWS leading to SEC fines. Then labelling standards were consulted, implemented, lambasted and amended all to codify what being green meant to stymie green fakery. Belying all was a divest versus engage friction fought out between niche industry Social Responsible Investing (SRI) incumbents and much larger and newly converted ESG firms. The latter won. This in turn generated a lot specific industry fatigue, which gradually took hold into rising skepticism and cynicism with regards to ESG.
Performance vs Purpose: The Fiduciary Duty Fallout
In hindsight, conflating performance and purpose was always going to be a lazy gambit, to rely on capricious markets, and we have been reminded of markets’ inability to price risks beyond the current earnings cycle. Now we have seen the link between ESG and fiduciary duty come under challenge following a captured US policy U-turn. The fallout of which has been a run of ESG-related redundancies, particularly among US firms retreating from ESG and Net Zero.
Vanity or Vision? The Reckoning of ESG Advocates
Could that initial push by many ESG professionals and providers be accused of vanity? The push to Net Zero on the basis of a performance outcomes was always going to be a fool’s errand if markets reversed trend, as they have. Architects of “productive finance” please take note.
Time to Rebuild: Clarifying Long-Term Risk and Global Arbitrage
There is now a need to regroup and to clarify the implications of long-term risk on assets and portfolios. Meanwhile committees need assurances that Transatlantic managers (whom manage the vast majority of U.K. assets) are not committing some sort of arbitrage to ‘wash’ investors and legislators on both sides of the pond. U.K. trustees and committees will want to see reduced climate intensity across their portfolios; whilst carefully monitoring performance against the broader market. Just so long as we do not throw ESG into the fire as we feel the heat.
Advisers Left in the Dark: The Need for Dialogue and Direction
To date advisers have still not been consulted.
About JB Beckett
Across 30 years, JB Beckett has delved through the contentious and taboo of our industry, speaking around the world. In 2015 JB wrote “New Fund Order” and “NFO 2.0” in 2016 and co-wrote a number of books on digitalisation of asset management. Since 2020 JB has hosted the New Fund Order podcast – NewFundOrder.Buzzsprout.com. A multi-asset allocator for over 20 years, until 2018 JB was a fund gatekeeper at Lloyds and Scottish Widows. Today, JB is a member of Royal London’s Investment Advisory Committee and remains Emeritus of the Association of Professional Fund Investors and external specialist for the CISI.
