Of the ESG drama unfolding on the global arena and climate change claiming new victims

The buzz in the market is that when regulators have not yet defined what ESG labelling stands for, how can investment firms know what these letters stand for? In the absence of such a clear definition, these firms improvise with the net result that retail investors are taken for a ride

Business Monitor/By Ramesh Kumar

Forget for some time the Indian stance on the ongoing Russian-Ukraine war which is still attracting zillions of bouquets and brickbats. Instead, focus on another equally interesting issue close to India: climate change and the relevant ESG (Environmental, Social, and Governance) drama unfolding on the global arena.

A fortnight ago, a senior investment banker with the reputed HSBC got suspended for his punchy speech in Miami, the United States on what else, but the unabated climate change topic. Stuart Kirk, HSBC Asset Management-Responsible Investing, told the audience that too much is made of climate change. Instead, he recommended the central bankers to focus on growth and inflation – a topic that is keeping central bankers sleepless post-pandemic and the Russian-Ukraine warm since February.

US Treasury Secretary Janet Yellen recently admitted she was wrong about inflation projection and goofed up to India’s Reserve Bank of India governor Saktikant Das tweaking interest rates through a hurriedly arranged monetary policy committee meeting advancing it by a month.

Kirk, former Financial Times editor-turned-investment banker, compared the climate crisis to the Y2K challenge at the turn of the millennium. “There’s always some nut job telling me about the end of the world…. Amsterdam has been six meters under water for ages and that’s really a nice place. We will cope with it,” Kirk shared in a witty speech unaware these utterances would endanger his job.

Though the beaded and baldy Kirk got suspended pending an investigation by HSBC, the high priests at the Wall Street Journal cheered him saying, “he merely said what many in his industry believe but are too timid to say. Climate change poses a negligible risk to the global economy and bank balance sheets.”

Forget the central bankers. Climate change is being used as an investment strategy and marketed under the catchy ESG tag. Significantly, the same ESG has landed German asset chieftain Ashoka Wohrmann of DWS, owned by Deutsche Bank, in a soup. Over the past few days, the offices of DWS were raided on alleged charges of “greenwashing”.

What has greenwashing got to do with ESG? Plenty. Globally, the climate change debate is generating a big buzz in the capital markets. ESG, as we know, stands for Environmental, Social, and Governance. Corporates, without exception, have agreed to reduce carbon emission by 2050. The tectonic shift from internal combustion engine or ICE-driven automotives to electric cars is part of that Save The Planet initiative. Oil giants, under pressure from private equity giants such as Black Rock and other investor activists, are gradually reducing their oil exploration investments and focusing on renewable energy routes.

There is a race among corporates to score highly on the ESG index. Unsurprisingly, the weightage for each element of ESG varies among a clutch of rating agencies. That is to say, there is no standardisation for a fair and impartial assessment. Taking advantage of this lacunae, the same company may be rated differently and such shoddy work is tapped by huge private equity firms to create ESG-focused funds, claiming these investments are “good and ethical” ones. Really so? Debatable.

This is where the term, “greenwashing” creeps in. Greenwashing is a marketing technique aimed at creating an illusion of ecological responsibility. Green communication doesn’t always mean that the company is environmentally responsible, according to climate.sectra.com.

That’s why the concept of greenwashing is frequently used by NGOs to denounce companies that claim environmental concerns while their activities and practices prove otherwise. The Exxon battle where activist investors, for example, have bulldozed their way into the board and ensuring the oil giant reduces its focus and investment in environment-unfriendly fossil fuel and instead divert funds towards renewable energy.

Given the marketing gimmick surrounding ESG, companies allegedly fudge their “E” concerns. This is where DWS Wohrmann got into a quagmire. In his Annual Report for FY2021, Wohrmann posted 115billion Euro ESG assets as against 459billion Euro towards ESG integrated assets for the previous year. Such a massive drop made the German security markets regulator BaFin suspicious leading to raids. Wohrmann has to step down. No option. Just not BaFin, even the Securities Exchange Commission of the United States is onto the fund managers of ESG branded products citing lack of transparency and vague interpretation.

Market analyst Tyler Durden does not mince words: “After years of being critical of “ESG” investing and how appending the label to literally any company immediately caused a misallocation of capital in its direction, it looks like the buzzword investing scam is starting to unravel in real time.

First, the Securities and Exchange Commission said that it was planning on cracking down on misleading ESG claims. New rules “would specify disclosures to be made by investment funds when they mention terms like ‘ESG’, ‘low-carbon’, or ‘sustainable’ in their names.”

The buzz in the market is that when regulators have not yet defined what ESG labelling stands for, how can investment firms know what these letters stand for. In the absence of such a clear definition, these firms improvise with the net result, retail investors are taken for a ride.

The noose is tightening. The SEC of US has set up a Climate and ESG Task Force in the Division of Enforcement. “Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations,” said SEC in its press release. (2)

The Task Force will evaluate and pursue tips, referrals, and whistle blower complaints on ESG-related issues, and provide expertise and insight to teams working on ESG-related matters across the Division. While HSBC’s Kirk’s suspension came because his HSBC bosses felt such a public stance would impact the giant’s own ESG-related and climate change-focused investment activities and its clientele, Wohrmann caught in the web of misreporting, courtesy whistle blower Desiree Fixler.

Is most of trillion dollar “sustainable investment” bogus and unsustainable? The drama is unfolding. Many more heads are likely to roll in the days to come and the fate of the ESG-related and climate change focused funds will be interesting to watch.

Does it mean the end of ESG era that excited the world? Not at all. With regulators stepping in to usher in order among the free-spirited capitalist world, the growth and pace of ESG and climate-related investment options may slacken, no doubt. With social media on the ascent, unlikely to be silenced despite all data privacy concerns and government move to tighten the lid on the Big Tech, occupants of corner offices and chief sustainability officers will be under the lens seamlessly. Nowhere to hide if caught. Present day investors are eagle-eyed and any lapse on the part of business enterprises will lead to reputational damage which no CEO would wish. (3) Out of the current chaotic scene, a better corporate governance will emerge to create a truly sustainable planet.

Tom Braithwhite of FT aptly sums up the drama unfolding: “The jig is up for ESG. Regulators are swarming. Investors’ enthusiasm is waning. Executives are revolting. For the armies of asset managers, data providers, consultants and advisers that have sprung up in the past 10 years this is an existential threat.” Well said. (5)

However, one big lesson to remember: don’t fall for marketing hype. Do your own due diligence.

(Main/featured picture from Pixabay has been used for illustrative purpose only)

Also read by the same author: Fizz is missing @ Davos: Let’s admit it, the World Economic Forum 2022 is a flop – THE NEWS PORTER

Ref:
(1) https://www.zerohedge.com/markets/esg-funds-post-largest-monthly-outflow-record-greenwashing-racket-starts-unravel
(2) https://www.sec.gov/news/press-release/2021-42
(3) ESG exposed as the world is forced to switch priorities, Gillian Tett, FT Money, 4 June 2022
(4) Greenwashing is tmepting for CEOs who tell stories, the Financial Times, 4 June 2022
(5) Move over ESG, the time is right for a BS Index,, Tom Braithwaite, FT, 28 May, 2022

The author is a seasoned business and economic journalist. He can be reached at konsultramesh@gmail.com. In this column, ‘Business Monitor’, he presents a global perspective on happenings in the world of business, commerce, economics and trade. The views are the author’s own and The News Porter bears no responsibility for the same.