In a just-published series of critical articles in The Wall Street Journal, columnist James Mackintosh outlines the "failed promise" of ESG investing and describes it as "absurd" to claim that investments in green bonds deliver higher yields. He also warns that "bubbles" in sustainable investing can "sink your portfolio" and lectures that investors who think they can both save the world and make a profit need to go back to basics. His conclusion: "These investments don’t do much to make the world a better place."
That’s a strongly worded attack against the estimated $121 trillion of assets under management by global signatories to the U.N.’s Principles for Responsible Investment aimed at a variety of ESG-related investments. His analysis touches on some seriously problematic issues with mission-driven investing, but the heated rhetoric challenges the very premise of the fastest growing trends in investing. To Macintosh, values don’t matter in investing — just value, or shareholder profits.
The series lit up threads of online comments from ESG advocates. Generally, the articles were perceived as a superficial "hit job" hosted by a hostile Murdoch-owned media source. Singled out for specific criticism were Macintosh’s assertions that "what’s better for the environment is worse for the investor" and "If ESG truly offers rewards to investors, it brings no virtue. If it is virtuous, expect a lower reward." Several cited Morningstar’s recent report, "Why Sustainable Strategies Outperformed in 2021," to refute these underperformance claims.
It’s hardly shocking that The Journal would take such a stridently purist shareholder capitalism point of view on climate-related finance issues. As recently as 2018, the paper told one ESG pioneer, Jeff Gitterman, that it would never publish stories on climate change or sustainable investing (that position has since changed). So it’s not surprising that ESG investors such as Gitterman, co-founding partner and creator of Sustainable, Impact and ESG Investing Services at Gitterman Wealth Management, are challenging the columnist’s view.
Gitterman and others argue that Mackintosh creates a false, either-or choice that misrepresents ESG. "I see a complete lack of nuance in the description of ESG [in the columns]," he says. "There is no one-size-fits-all ESG, and we know that."
Gitterman believes that just focusing on ESG investment underperformance ignores critical features of ESG — "For me, ESG is not an alpha driver — but it is about making money, not saving the world. It’s a risk mitigation tool, one not in the typical toolbox used in diligence, and that is material at the bottom line. I think of ESG as the GPS of investing — you can capture more big data with it, and that gives you more route references and choices as an investor."
ESG is a risk mitigation tool, one not in the typical toolbox used in diligence, and that is material at the bottom line.
Veteran observers of ESG are well aware of the pitfalls of ESG in its current state. Joel Makower of GreenBiz cautions, "For all the salutary change it may be creating in financial circles, the ESG landscape remains treacherous and unforgiving."
Felicia Jackson, a founder of The Net Imperative Ltd. and New Energy Finance, has questioned if ESG is even fit for purpose-related investing. ESG can create a "risk profile" of an investment, she explains, but doesn’t "tell us anything about the impact on overall emissions, pollution, water use, or society and the environment." While Jackson notes that ESG "can help cut costs significantly … the question is how far an ESG rating can take you?" These real-world questions will require better answers if ESG is to be the effective tool its proponents are advocating for.
Practitioners with experience and expertise in ESG, such as Tariq Fancy and Desiree Fixler, have launched informed, detailed and skeptical critiques that are persuasive. Fancy, former chief sustainable investment officer for sustainable investing at BlackRock, has claimed that the products of the booming sustainable investing industry are "dangerous placebos." He argues that the private sector’s structural bias towards incentivizing short-term profits and returns makes it incapable of delivering the critical systemic solutions needed to mitigate climate change: "If you are doing something that’s slowing us down under the guise of responsible business, you need to be held accountable."
Fixler, former group sustainability officer of DWS Group, asset management arm of Deutsche Bank, called out the firm for lacking a clear ESG strategy and operating in a way that is counterproductive to the concept’s intent. "Posturing with big statements on climate action and inclusion without the goods to back it up is quite harmful as it prevents money and action from flowing to the right place."
So what is to be done? Mackintosh’s bottom-line alternative is an investment sector driven by the government. "It is simpler and far more effective to tax or regulate the things we as a society agree are bad and subsidize the things we think are good. The wonder of capitalism is that the money will then flow by itself."
Mackintosh uses a rhetorical trick called impossible expectations — demanding unrealistic standards of proof — when he uses the phrase "we as a society agree." Does any thinking citizen currently think the government in today’s toxic political climate can effectively gather the civic consensus needed to "agree" on what is to be done about climate change — and then implement it?
ESG is 'like the booster engines needed to launch a rocket which are then discarded after liftoff.'
As Makower puts it: "The whole topic of sustainability and climate change is being viewed as a wedge issue in the United States during the upcoming 2022 and 2024 election cycles, with the right-wing pushing back on the left for its 'radical' policies. This could, at best, retard the pace of change. At worst, it could bring whatever progress exists to a screeching halt."
As a solution, the idea that government and the market could combine to "tax and regulate" within the urgent time frame required to cool off our overheating planet is as blue sky as any delusional fantasy of pivoting the world’s energy transition overnight. Even severe critic Fancy doesn’t buy this solution. "Creating the systemic change we claim to seek means shedding a love affair that has persisted for decades with the illusion, that left to its own devices, the market will magically serve the long-term interest," he has said.
Fancy does not believe that the market will solve big environmental and social issues. But in a convergence between "right" and "left" views, he echoes one aspect of Mackintosh’s proposed solution: From now on, the only way to make headway on real climate mitigation, Fancy says, is for governments to reassert their leadership and rule-making powers and call the shots on future climate policy. "We have the tools in place to regulate a system of competitive markets and free enterprise through a legal system, property rights and other structures to protect our shared interests."
I have regularly commented on the many problematic issues with ESG. When I wrote "ESG is huge and terribly flawed," I said that there is much more work to be done to raise ESG reality to the level of its visionary promise. Gitterman, ever handy with a metaphor, describes ESG as "like the booster engines needed to launch a rocket which are then discarded after liftoff. ESG has raised awareness of certain problems to a high level of concern."
The sensible word comes from long-time finance veteran Hazel Henderson of Ethical Markets, who told me, "ESG is necessary. But it’s not sufficient." A possible next step: to explore points of convergence, particularly on the role of markets.
Perhaps we can agree on that — for now.