EY global vice chair of sustainability Steve Varley has said ESG investments are “definitely at a crossroads” amid concerns of greenwashing at some of the world’s largest funds.
The United Nations (UN) first laid out principles for environmental, social, and corporate governance (ESG) investing in 2006. Secretary General Kofi Annan hailed the considerations as critical to underpinning “responsible investing” in the financial markets.
Sixteen years later, global assets held in ESG funds have ballooned to roughly $35 trillion. However, recently, ESG has faced a backlash, including from Tesla CEO Elon Musk, who tweeted ”ESG is a scam” to his nearly 100-million followers after Tesla lost its place in the S&P 500 ESG Index – a ranking based on companies’ overall performance relating to financially material ESG factors.
“There’s nowhere near the level of influx we saw two or three years ago when ESG was really being touted as a kind of miracle cure,” said Varley in a conversation with Yahoo Finance Live. “You could do well financially, and it could do good in the world. I think we’re taking a pause in that definition now. “In the U.S. ESG has become far more politicised than I’ve seen it happen anywhere else in the business world. I don’t really know where it’s going to go in the next 12 months.”
EY has doubled down on ESG in recent years, and became carbon negative in 2021 after slashing its emissions by 56% from 2019 levels. That accomplishment coincided with growing scrutiny around green funds, accusation of false advertising, and scepticism around the stated impact of the funds’ claims.
For example, in June German officials raided the offices of Deutsche Bank’s DWS who had been under investigation for over a year after concerns were raised by the firm’s former sustainability chief Desiree Fixler, who alleged that DWS misrepresented the extent to which its assets were invested using ESG integration in its annual report.
‘Terrible Teenager’
“What we have now is a three-letter acronym that’s 16 years old [and] I think we’d all agree is showing signs of being a terrible teenager,” Varley said. “It’s being misused in places and is also doing good in places.”
Political Pushback
The U.S. Securities and Exchange Commission (SEC) has proposed specific disclosure guidelines around ESG funds, including required disclosures of greenhouse gas emissions associated with portfolio investments who claim to consider environmental factors.
However, Republican lawmakers, particularly in red-leaning states, have accused the SEC of promoting “woke capitalism,” while BlackRock, the largest manager of ESG mutual funds raised concerns the agency’s requirements would “lead to the disclosure of proprietary information surrounding the fund’s ESG investment process over and above what funds are required to disclose for other principal investment strategies.”
Despite this, Varley still believes ESG funds remain a “net good for business,” but highlights the divide between the U.S. and Europe, with the EU’s Sustainable Finance Disclosure Regulation requiring investors to qualify ESG funds in one of three categories. A recent analysis by Morningstar found that nearly a quarter of green funds did not qualify for the ESG designation based on the rules in place.
“We think that a lot of the measures [in the U.S.] will be toned down,” Varley said. “That’ll make a really big difference though to the EU, where the EU is still going really strong to regulate this whole area and really expect a lot more from companies in their reporting. For big global companies, that’s just going to make their life a lot harder as they now have to work in two different regimes.”
At its heart, ESG is seen as a well meaning framework that allows investors to put their money into something that offers a good financial return while also having a positive impact on environmental, social, and governance issues.
But, what is clear is the lack of regulation in the space, which opens the system up to abuse and turns the idealistic framework into “a great marketing hub to grab a whole lot of dollars by sticking a label on it” according to Duncan Grierson, founder and CEO of green investing platform Clim8.
Nobody is suggesting a return to business without ESG is the best way forward. With the right structure in place from regulatory bodies and governments, ESG can once again return to its original purpose – align businesses with important sustainability goals.
