• Hatem Mahbouli

ESG: The Rise and The Mires

The concept of responsible investing has taken on various buzzwords in the world of economics and finance: we have all heard it being coined as Socially Responsible Investment (SRI), Corporate Social Responsibility (CSR), and now Environmental, Social, and Governance (ESG) – all undoubtedly related, sometimes overlapping, nonetheless operating in the same principles at its very core. But when exactly did 'responsible investing' by the name of ESG as we know it take off, and what are the salient doubts about it so far, in spite of its agenda of transforming the markets for the better?

The rise of ESG investing began in 2004 when over 50 CEOs of major financial institutions were addressed by former UN Secretary General Kofi Annan in a meeting convened with the goal to incorporate environmental, social, and corporate governance issues into capital markets. A year later, the term ESG was coined in the report entitled Who Cares Wins, which contemplated that the factors that comprise ESG "will ultimately contribute to more stable and predictable markets, which is in the interest of all market actors."

Building up on the initiative, in 2019, the Business Roundtable – a group of America's top executives – issued a statement whereby it seeks to "modernize its principles on the role of a corporation," with a commitment to invest in their companies' workforce and communities.

Since the abovementioned milestones, global ESG assets are expected to surpass USD 41 trillion by the end of 2022, and USD 50 trillion by 2025. In terms of whether or not ESG investing is indeed profitable, there is sufficient evidence pointing to this conclusion. US ESG funds have outperformed its non-ESG-focused peers, and majority outperformed the S&P 500. Given this success, there are those who suspect that the ESG label being incorporated into the funds' names have simply lured socially-conscious investors into these funds – a successful marketing based on 'greenwashing', so to speak.

In addition, valid questions are still raised as to where this outperformance is really attributed: there are also data that supports the ESG funds' overweighted investing in tech companies are the reason for their successes, not strictly because it invests in 'good' companies. For instance, the third biggest ESG-named fund, BlackRock's iShares MSCI USA ESG Select Social Index ETF, reportedly has almost one-third of its USD 4.1 billion devoted to tech-related companies such as Apple, Microsoft and Alphabet. Nevertheless, it is still worth pointing out that this correlation may very well be unavoidable as tech companies also happen to be frontrunners in announcing their net-zero-by-2050 ambitions.

Lastly, on the topic of climate, it follows that a logical step in ESG-proofing a portfolio is by divesting in fossil fuels. There is a glaring problem here: investments on these businesses are only being disposed, and subsequently acquired – usually in private equity, free from the pressures of the mandates to which publicly-listed companies are subjected. Reportedly, since 2010, the private equity industry has invested at least USD 1.1 trillion into the energy sector, majority of which is focused on fossil fuels. As such, the goal of limiting the sourcing of and dependence on fossil fuels in line with the core principles of ESG amidst the threat of climate change appears lost.

These concerns, however, do not mean that ESG investing is not as sustainable and profitable as it ought to be – just, perhaps, that more work is to be done in the field, of both investors and corporations alike.

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