ESGs—which denote a commitment to Environmental, Social and Governance interests—have been around for over two decades. But the war in Ukraine has put them under the public microscope. We take this moment to reframe the inner workings of ESGs: how democratic and effective are they? And why are they backing up the war through Russian assets—should we be concerned?
In her speech at COP25, in 2019, the climate-change activist Greta Thunberg astutely noted, “The biggest danger is not inaction. The real danger is when politicians and CEOs are making it look like real action is happening when in fact almost nothing is being done, apart from clever accounting and creative PR.”
A more “sustainable” form of capitalism has grown. Although environmental, social, and governance (ESG) reporting has become widespread, and some firms are deriving benefits from it, environmental damage and social inequality are still growing. Here’s why.
DEMYSTIFYING ESGs
What gets measured doesn’t necessarily get managed
ESG stands for the environmental, social and governance factors that are used to measure the impact on society of an investment you make in a company or business.
Another way to think about ESG is that it’s a tool to assess how sustainable a business is: Is it affecting the environment in material ways that are not taken into account? Does it have social issues? Does it treat its workers well?
But reporting is not a proxy for progress. Measurement is usually nonstandard, incomplete, imprecise and misleading. As Duncan Austin, a former ESG investment manager says, these “milestones” and investments are often just “greenwishing”(wishful thinking in the ESG world). The focus on reporting is actually an obstacle to progress—through exaggerating gains and distracting from the real need for changes in the system.
The problems with reporting
1. Lack of auditing. Most companies have complete discretion over what standard-setting body to follow and what information to include in their sustainability reports. As a result, a lot of the input data is misleading and incomplete.
2. Misleading targets. According to a 2016 study that examined more than 40,000 Corporate Social Responsibility (CSR) reports, less than 5% of reporting companies made any mention of the ecological limits constraining economic growth. Even fewer—less than 1%—stated that when developing their products, they integrated environmental goals that align with an understanding of planetary boundaries.
3. ESG is a multi-trillion dollar business. Let’s recognise that ESG has become a huge business. According to the Global Sustainable Investment Alliance, nearly two out of every three dollars classified as socially responsible investment are in “negative screen” funds. Those are funds that qualify as sustainable because they exclude one or more categories of investments (say, tobacco or firearms). Such investing may appeal to individual investors, but it does next to nothing to track, promote, or reward ESG impact because of its unhelpful definition of “sustainable”. Even more concerning is the fact that these funds are explicitly marketed as sustainable. A 2020 study by Barclay’s looked at two decades of ESG investing and found no difference between the holdings of sustainable and traditional funds, and an investigation by the Wall Street Journal revealed that 8 of the 10 biggest ESG funds in 2019 were invested in oil and gas companies.
4. Non-standardised and incomparable metrics. It is nearly impossible to compare companies on the basis of ESG performance. Individual firms in the oil and gas industry, for instance, report on sustainability in varied ways. It is sometimes difficult even to compare the performance of a single company from year to year because of changes in methodology or decisions to use different standards to measure the same thing.
5. Challenges in assessing the success of socially responsible investing. While measuring equity returns is relatively straightforward, measuring ESG impact is far more complicated. If one of the goals of socially responsible investing is to deliver positive social and environmental outcomes, how do we know if that investment is working? A recent study found little evidence that it is. According to it, the vast majority of ESG investment is allocated to funds that stay away from specific industries (mainly tobacco and weapons) and does not look at bigger environmental concerns closely.
(If you’re looking for more background on ESGs, check out this podcast on ESGs on the Angry Clean Energy Guy!)
Why is this not being met with more serious condemnation from Europe? We might look at their dependence on Russian oil & gas— nearly 40% of natural gas used by the EU is exported from Russia through Ukraine pipelines (3/7)
— Slow Factory (@theslowfactory) February 24, 2022
THE ONGOING WAR: FOSSIL FUELS’ COMPLICITY
Russia’s control over gas production
Putin’s ability to wage war in Ukraine and threaten the stability of Europe comes from his control over Russian oil and gas production. Forty per cent of Russia’s federal budget comes from oil and gas, which make up 60% of the country’s exports. This October, Russia was making more than $500m a day from fossil fuels, money that goes directly into funding Putin’s war machine.
Russia would not be the oil and gas superpower it is today without the help of western oil companies like ExxonMobil and BP, which owns a 20% share of Rosneft, Russia’s state-owned oil company. Back in 2014, when Rosneft’s oil and gas production was largely flat, ExxonMobil partnered with Rosneft to help them modernize operations and expand production in the Arctic.
Bernie Sanders made a link between Ukraine and the green transition: sanctioning Russian oligarchs to pave the way for a green transition. “In the longer term, we must invest in a global green energy transition away from fossil fuels, not only to combat climate change but to deny authoritarian petrostates the revenues they require to survive.”
The only viable long term solution is for Europe—and the rest of the world—to move as quickly as possible to reduce its dependence on fossil fuels with energy efficiency and renewables.
Exxon, BP and Shell are leaving Russia—but why?
Putin’s oligarchy is built on oil and capitalism. Western energy companies have invested and operated in Russia for a long time—30 years for BP and more than 25 years for ExxonMobil. According to this article by The Conversation, Russia’s invasion of Ukraine has completely changed Western energy companies’ cost-benefit analysis of doing business in Russia.
“ExxonMobil supports the people of Ukraine as they seek to defend their freedom and determine their own future as a nation,” the company’s statement said. Contrary to the “humanitarian” reasons they claim, oil companies are leaving because business is bad for them if they stay in Russia.
Why are ESG companies backing up the Ukraine war?
Earlier this month, Bloomberg headlined: “ESG Finds Itself at Crossroads After Investing in Putin’s Russia.” An investing movement that promotes itself as a protector of people and the planet has somehow found itself providing capital to the autocratic regime behind Europe’s worst military conflict since World War II.
According to Bloomberg, funds labelled ESG own shares of Russia’s state-backed energy behemoths Gazprom PJSC and Rosneft PJSC, as well as its biggest lender Sberbank PJSC. The funds also hold Russian government bonds, providing money that ultimately helped fuel President Vladimir Putin’s autocracy.
These fund managers held at least $8.3 billion in Russian assets right before President Vladimir Putin launched a war on Ukraine. The figure is based on an analysis by Bloomberg of roughly 4,800 ESG funds representing more than $2.3 trillion in total assets. Additionally, the world’s biggest ESG-focused exchange-traded fund—BlackRock Inc.’s $23.7 billion iShares ESG Aware MSCI USA—holds shares of companies ranging from Raytheon Technologies Corp. to Exxon Mobil Corp.
“ESG is being used ineffectively,” said Clements-Hunt, founder of advisory firm Blended Capital Group. Investors should be measuring risks across entire systems not just corporate risks, but instead, “the obsession with easy money-making is overriding everything.”
It’s more nuanced than calling for a complete boycott
Many have pointed out that rejecting Russian assets entirely also can mean cutting off good companies. These often include technology firms that are actively trying to provide transparency in defiance of Putin’s restrictions.
Rachel Robasciotti, founder of Adasina Social Capital in San Francisco, which runs an $89 million ETF that focuses on social justice issues, said that unless a business is clearly an instrument of a despotic regime, it’s important to differentiate between companies and the countries in which they operate.
“We don’t punish companies for the actions of the country where they are headquartered,” she said.
Side A: Those representing the more mainstream side of ESG investing argue the term is widely misunderstood. They say that it is just a screening tool to protect investments from environmental, social and governance risks.
“There are still people who inappropriately conflate sustainability and ethics,” said Hortense Bioy, Morningstar’s global head of sustainability research. “Sustainable and ESG funds aren’t the same as ethical funds.”
Side B: As reported by Bloomberg, Paul Clements-Hunt, who led a group that coined the term ESG back in the mid-2000s, thinks differently:
“If you don’t factor in autocracy and a malevolent government, then you have failed in your ESG assessment,” he said. Philippe Zaouati, chief executive of Mirova echoed this: “There is no responsible investment if there is no democracy.”
Also: Europe’s energy crisis
The director general of Engie said that without Russian gas, there will be a “real problem next winter”. If the 27 EU states decided to stop gas imports, “energy prices would reach extremely high levels. We will be able to spend the winter since winter is coming to an end. The real problem is in the medium term, that is to say for next winter.”
“This is an extreme scenario because there would be such volatility that the markets could stop working. This is why it is important to anticipate these measures”, she added.
In response to high prices, the European Union is planning to tax the profits oil and gas companies have made from recent price hikes and pour the revenue into renewable energy, as a means of reducing the EU’s dependency on Russian gas and fossil fuels overall.
The U.K. Labour Party even proposed a one-time windfall tax on corporations operating in Britain’s North Sea oil fields, proceeds from which would help offset skyrocketing home heating prices.
Getting the world off fossil fuels is core to ending the power structures that have led to Putin’s invasion of Ukraine.
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WHERE TO FOCUS
The market alone will not address worsening social and environmental challenges:
1. Measure better. The current frameworks for ESG measurement are confusing and burdensome for companies. We need a transparent application of rigorous targets in line with nature’s limits.
2. Spend government funds on the right things. We are using taxpayer money to subsidize energy sources that accelerate future environmental damage. Governments need to invest those resources in R&D for faster growth in renewable energy instead.
3. Change the system. Corporations exist within a broader system. And they should be prevented from lobbying/co-opting it. We need a shift in focus away from GDP and more commitments to regenerative culture and collective value.
