A good time to re-assess the value of ESG investing

No City earnings call, annual report, or even chief executive interview is now complete without a mention of what a firm is doing to meet its ‘ESG goals.’ At times this has bordered on the ludicrous: Terry Smith, the legendary investor, found a warm audience to his critique of Unilever attempting to define the purpose of Hellmann’s mayonnaise. 

The war in Ukraine – and the return of conflict to the fields of Europe – has forced a reassessment of what those environmental, social and governance benchmarks actually mean. It is probably overdue. 

Let’s be clear: the world’s ‘ESG’ problems will be solved not by political pressure but by the same forces that have shaped our response to myriad challenges before: market capitalism. There is no profit in the end of the world as we know it; at the most basic level, it stands to reason that investors and fund managers will seek to route capital towards things that make said apocalypse less likely. The reality of today’s market is more complex, but not by much, 

But that does not mean that the extraordinary spike in ESG commentary over recent years, particularly since the pandemic hit, has all been positive. It is absurd that so many ESG funds automatically exclude energy firms, as if those energy firms are not playing an absolutely vital role in ensuring homes can be heated and businesses can stay open. It is similarly absurd that firms which have no qualms operating in Hong Kong (indeed sometimes operating all but hand in glove with the Chinese Communist Party) have the cheek to talk up their ESG credentials on glitzy parts of their websites. And in the wake of Russia’s invasion of Ukraine, it is right too that defence firms are being reconsidered. 

Some ESG fund managers have woken up to this faster than others. There are now some investing in aviation firms or carbon-intensive industry. ESG investing is a force for good, but it does more when it accepts the world is not always perfect.