Paul Attenborough
General Secretay - ImpACT

This article is designed to introduce the reader to the concepts of ESG investing, some of the ethical considerations and the arguments that surround it.  For the uninitiated the concept of ESG – Environmental Social, Governance - has been around for some years; but in todays’ climate we have overlaps with many other considerations of ‘ethical’ investment, and a plethora of new nomenclature that has grown up around the subject such as ‘greenwashing’, ‘sportswashing’ and ‘greenium’ for starters (more of these later).  Additionally, from the critics’ perspective the investor spectrum needs to be understood, from the out-and-out cynical profit seeker, to the naturally prudent and the enthusiast; the trader, the investment fund – including sovereign wealth funds – the private investor, and the corporate investor deploying shareholders’/company funds.  The article is necessarily brief, and possibly will appear a little superficial, but with the upcoming COP26 summit in Glasgow – with its focus on the environment - it is timely.  

For its purposes, this article we will first explore the response to ESG as used by the investor community; and then look at some of the issues associated with it; including, for example, the flexible use of some terms; we must also look at the cross-over with broader environmental issues – ‘greening’ of business, carbon capture and associated terms and address where companies may use book keeping exercises to satisfy their environmental need thus satisfy their ESG requirement – but does it bear examination?  In a short article like this it is impossible to cover these in depth, but to highlight them, and at a later date we will look at each.

As the FTfm reports the investment community is in a rush to go green[1] - to be seen to be responsible, however this report also indicates the scepticism that some investors are now feeling; the investor response to ESG has been mixed to say the least; and it is evolving, from the cynical, critical, and analytical, most recently[2] for example where the response of one senior asset manager that the idea of investors are able to make more money by ‘doing more for the planet or society’ is illusory and raises the question of whether adherence to ESG principles could raise ethical issues – essentially a potential conflict of interest over profits above ESG investing.  The article cites the Global Sustainable Investment Alliance reporting investment in assets defined as sustainable has increased to USD 35.3 trillion in 2020.  In the UK alone investment trusts focussing on renewable energy raised £1.7bn[3]  However, another view expressed was that there should be a clear distinction between philanthropy and investment; the FT also reports[4] that the ‘Greenium’ (a premium to what would be an assumed price for a sovereign or corporate bond, for example, to reflect that these bonds will be used to fund environmental, or environmentally friendly spending) margins on fixed income bonds are falling as fund managers are beginning to question whether issuers of these bonds should be judged on their whole performance; however fund managers are keen to demonstrate their investment are responsive to ESG criteria.  Further Andrew Edgecliffe-Johnson reports a former BlackRock investment manager that ESG was a deadly distraction from real reforms and an employee fired by Deutsche Bank called its sustainability claims ‘harmful posturing’.[5] In this article he calls for more transparency, better data and greater accountability and notes the proposed establishment of an International Sustainability Standards Board.  On that theme the FTs Innovative Lawyers report[6] dedicates a section to the demand for legal expertise to help companies to meet sustainability targets. It also reports that the European Commission is to establish a labelling system to identify green projects that meet with EU environmental goals.  The article does look at specific case studies, including Greta Thurnberg’s petition to the UN Committee on the Rights of the Child, and a case for Save the Children to argue for the rights of the child in the European Court of Human Rights.  And of course the ‘Big Four’ accounting houses aren’t behind the trend – establishing units to take advantage of the demand for sustainable investment.

With regard to the Environmental aspect, we should consider the all the aspects of a company’s behaviour, which might revolve around carbon footprints (emissions, trading, sequestration/capture), throughout the value chain, the requirement for disclosure, gross harm to the physical environment, mines, etc, deforestation – as discussed in another article amongst other aspects – in the context of COP26 these will be discussed in another article. 

On the social side it is still necessary to examine the whole of the company supply chain – for example as reported in September major clothing brands – ‘Primark, Next and JD Sports have yet to sign up to a landmark deal to protect garment workers in Bangladesh’[7]. Current reports indicate that a manufacturer of rubber gloves to be supplied to the NHS during the pandemic although passing due diligence in the UK, allegations of the use of slave labour in production in Malaysia are being made in the US.

One of the issues with even the concept of ethical investing is the terminology that commentators have brought to the table, for example ‘greenwashing’ where a company will take a high profile sponsorship, for example BP, and museums where it has been well reported the protests that have surrounded some of the exhibitions; but a more egregious example recently reported is the Indian conglomerate Adani Group who is to sponsor the Science Museum’s Energy Revolution Gallery; albeit the wind and solar arm of the Group, yet as another arm opens a new coal mine in Australia - Anjana Ahuja[8] in the FT also draw attention to Peter Stott’s book Hot Air which recounts the efforts of the oil and gas industry to distort the science of climate change over the years.

A particular area of concern should be Governance – and this raises questions as to the involvement of investors in particular projects or businesses where co-investors may have questionable relationships to events, policies, or regimes; one aspect of the whitewashing of such aspects is the (relatively) new concept of celebrity endorsement – one example is the recent appointment of Prince Harry to the US mental health organisation ‘BetterUp’ as chief impact officer – the company has the sovereign wealth fund Mubadala of Abu Dhabi as a major investor, which Emirate has had a questionable human rights record.  This leads to the new concept of sportswashing.  This is levelled particularly at the countries of the GCC, most recently with the takeover/purchase of Newcastle United (a British football club) that had been languishing in the doldrums by funds led by the Saudi Public Investment Fund (PIF).  The Fund is chaired by Prince Mohammed bin Salman and many would have it that this in egregious example of sportswashing where the human rights record of the Saudi authorities is eclipsed by the ecstasy of a grateful fan base – the opportunity for funding of new cast of players to propel the club to greater heights.  Not that this is a business investment, so the rules apply, Amanda Stavely who organised the £305 million deal, has a 10% stake is quoted as saying ‘extremely busy at reviewing the business’[9]. But these deals are open to scrutiny and criticism – cf Jonathan Norcroft[10] in the Sunday Times, who raises not only Kashoggi’s murder, but women’s rights’ activists detained in Saudi. It should be stated that FIFA ruled that their rule of fit and proper persons to run a football club were met. Sportswashing charges may also be levelled at UAE through Sheikh Mansour who invested in Manchester City some years ago, and Qatar that invested heavily to win the World Cup 2022.  But on a positive note, as a variety of authors have reported change has is taking place , albeit incremental and too slowly for some, but with the added scrutiny from the World’s media, and pressure from co-investors, these will become more apparent and beneficial to the working rights of all, for example as reported this month[11] the increasing role of women in the retail environment in Saudi, and in Qatar, for example, living, and working conditions of the construction workers on the World Cup stadia.  Participation in these economies may change behaviour ‘from the inside’, but it must be thought through.  Away from the Gulf we can examine investment in Russia, China, Indonesia, even Australia, amongst others and whether they meet our requirements; many of these investments will be subject to personal judgements until recognised norms and criteria are established.