Tuesday 30 June 2020 8:02 am

Confession of an ESG sceptic: How I learned to stop worrying and love ESG

Bill Blain is market strategist and head of alternative assets at Shard Capital. He writes a daily market commentary called The Morning Porridge

For a long time, it would be fair to say I have been brutally sceptical about Environment, Social and Governance (ESG) investment. 

However, the Covid-19 crisis has turned ESG from a trendy investment fashion to something that matters.

My scepticism began with the fact that ESG was an unbalanced concept. Too many people focus only on the “E” issue. If it’s green, it must be good. If it’s dug out the ground, it must be bad. The over-emphasis on E skews the effectiveness of the whole ESG debate.

I would argue that effective corporate governance and a strong social conscience are even more important than being “green” — especially at this stage in a global recovery. If you want to stall recovery, an easy way to do so would be to obstruct any investment with even a hint of “not-green” about it.

Indeed, another serious concern I had with the concept is that it has been far too easy for fund managers of the middling sort to use ESG as an ill-considered blanket excuse not to invest.

Your clothes and food might come from agricultural sources, but I would reckon most of the stuff you use today will have been “dug out the ground”. If you jump on your bike, are sitting at a laptop or thinking about cooking, you will be using goods made from minerals that were mined. 

ESG must become pragmatic and balanced. You can’t build wind and solar farms without steel, and you can’t make steel without metallurgical coal. We won’t be able to use our wonderful electric cars unless we hew scarce lithium out the ground, (which is impossible to recycle) and burn gas to produce electricity. 

But it’s equally critical ESG also reflects social and governance aspects. These are the areas where investment practices have utterly failed in recent years.

To illustrate, how many fund managers work for firms that invest in Boeing or Tesla? Boeing has failed on every aspect of ESG. While its stock price rose, no one asked the right governance questions about the wisdom of the firm allocating profits to short-term stock buybacks that justified obscene executive bonuses. No one questioned its lack of green vision: why that money was not being invested in developing a new fuel-efficient short-haul regional jet built from lightweight composites to replace the B-737. 

Boeing is a 100 per cent ESG Fail. Yet recently, Boeing was able to raise $25bn from the corporate bond market.  

Thousands of other listed companies fare similarly badly at the ESG test. I have nothing against Tesla electric cars, and at least the environmental aim there is clear. But Elon Musk utterly fails every S&G test I can come up with. 

That’s been great news for him — collecting a $750bn stock option bonus and dragging happy stockholders in his wake. But in my mind, he’s a bad person creating a massively overvalued company.

In contrast, I would score the oil majors highly on ESG factors. They are spending on green solutions, understanding that their long-term future survival as viable and profitable companies depends on securing their niche at the forefront of clean energy provision. That ticks the boxes better.

That said, the E in ESG is obviously critically important, and the times are a changing. Renewables are back in fashion — but something has changed. Now for the first time, I’m also hearing pragmatism from the E-side, a realisation that we’re still going to be using fossil fuels in 50 years, but it’s likely to be gas rather than coal or diesel.

One thing we might have learnt from the coronavirus pandemic is a sense of the real, that nothing works quite like you hope it might. That’s likely to spur investment into a broader range of fields. 

For instance, renewables — it’s not just solar and wind. These are great, but they are not entirely reliable or predictable. In contrast, tidal power is 100 per cent reliable, but today it costs about 10 times as much to produce as less reliable renewables. If we were to spend modest sums developing tidal power, experimenting with more efficient and easily maintained systems, that cost will quickly fall to five times that of wind. At three times more costly — as production scale costs kick in — tide becomes more efficient than other renewables – because it is utterly reliable.

The tide comes in and out every six hours 40 minutes. The UK is blessed with some of the best tides on the planet sweeping around our coasts, with the ability to power Britain 24/7. Recently I expressed the idea of redirecting the precision aerospace engineers of Rolls-Royce in renewable energy markets, and was delighted to see the line quoted back a few weeks later in an interview the Ed Miliband — now shadow business secretary.

If we can redirect the whole UK aerospace industry into the need new markets the virus will spawn, then what an ESG victory that would be.

Main image credit: Getty

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