Why ESG is not Greenwashing
By: Cary Krosinsky
Tags: Sustainable Investing, Sustainability, Sustainable Development, Esg, Greenwashing

by Cary Krosinsky

There have been a number of articles recently suggesting that ESG practices can be a form of greenwashing such as this recent piece from Oxford’s Ben Caldecott (which we don’t totally disagree with) or this recent piece from the likewise thoughtful Duncan Austin, formerly of Generation Investment Management.

We would like to suggest these sorts of criticisms, while understandable, require careful consideration for the following reasons:

1) The intentionality of capital being directed towards sustainable finance remains insufficient, regardless of the recent welcome uptick of interest in the field. We require something on the order 1–1.5 Trillion USD for the low carbon transition alone, for example, and remain short of that annual necessary figure by a factor of something like three. At the same time, global corporations represent something like 1/3 of the global environmental footprint, therefore regardless of the specific ESG investments being made, managers who choose to engage with companies are doing something “green” as well, especially if they focus on the products people choose to consume as people are the other 2/3 of the footprint. And so a “pure green” approach to sustainable finance can miss out on important dimensions to consider that should be strongly encouraged.

2) Further to this, generic criticisms of ESG are not particularly helpful right now when considering the SEC’s ongoing pushback on shareholder resolutions. Certainly ESG data is not the elixir some might suggest, and we don’t completely disagree with Commissioner Peirce’s recent remarks, however the timing of pieces that are generically critical of ESG aren’t likely useful considering how some might otherwise use or attempt to use pieces overly critical of ESG, much as we agree that efficacy is of the essence.

3) In China, no one would think for a second that ESG is greenwashing. In fact, adapting and adopting ESG strategies more generally would seem most fitting for helping avoid crisis as we wrote today here in Top1000Funds.com. ESG adoption in China could provide a positive outcome for the otherwise terrible situation on the ground there, so why pour cold water over ESG in general with this in mind we have to ask.

4) Also in China, Green Finance means all of what is usually considered Sustainable Finance in the West, and we most certainly need to be mindful of issues such as inequality and abuse within corporate supply chains and so much more that isn’t just “green” by the most pure definitions.

5) Further, Asia is or is becoming half of the world’s economy as we speak, and as we write in our upcoming next, 7th book, we need China to succeed in its transition more generally, especially but not limited to its becoming a low carbon economy, so it can stand as an example the rest of Asia can learn from. How we accomplish solving climate change without Asia isn’t clear. And governance has long been a major issue for all investors considering investing in the region. One has to suggest that a purist, green approach to finance alone is potentially short sighted as a result.

6) Perhaps most importantly is the financial services industry itself, as it is largely performed everywhere. It has been too slow to react to the climate change imperative, and progress is typically slower than is ideal, and firms can be encouraged to do more by taking some steps now, even though more is clearly required. Why throw cold water on initial approaches? This sort of negative reaction can cause a panic or eject button to be hit, stopping all progress at such firms. Once involved, legitimacy can follow. This has arguably been the approach of PRI, where firms make slower progress at times than is ideal, so we understand the frustration, but it is hard to see large financial institutions changing overnight. This is why at Real Impact Tracker, we perform gap analysis for financial institutions who otherwise have progress which they can make if they better understood which strategies are most effective for purpose.

7) The problems that ESG approaches attempt to address are largely interconnected, so we also have to suggest that laser focused “green” solutions aren’t all that is required. Witness understandable calls for a “Just Transition” and other concerns on investment strategies that create needed efficiency and lower carbon which can also foster losses of some jobs and some opportunities for individuals and regions (surely the Gilet Jaunes movement could have been better anticipated). This also requires more holistic thinking than is implied or suggested in the articles cited above as well as others making the rounds to help ensure the necessary transition does occur.

All this said, ESG of course can be greenwashing.

ESG data scatterplots and articles on ESG showing the confusing variance between recent scoring on Tesla and ExxonMobil are evidence of the failure of the data industry to clarify what it does and doesn’t do, leaving less informed users understandably confused. Further analysis performed recently by Commonfund on the environmental components of ESG ratings only adds to a perceived overall lack of clarity and uniformity.

Source: Commonfund

Even the EU taxonomy efforts could be arguably considered to be itself a form of greenwashing, as well as at least some of the TCFD’s efforts to date, unless and until specific changes of behavior can be measured and demonstrated. Without demonstrated change, what are any efforts in this regard? At least ESG focused fund managers who engage with companies are trying to make a difference. I’m an “it’s all good” person more typically, why throw any of these efforts under a bus if they are at least helping make some progress or raise some awareness, even if they are insufficient for purpose, they are all useful steps on the road.

Lastly, fund managers who claim to be waiting for better ESG data is arguably the worst form of greenwashing of all. As per 1) above, we need more intentionality in investment more than anything. We also believe strongly that we can understand any company anywhere best if we understand their strategy, culture and business case, which the best investors try to achieve, often to the benefit of their clients.

Fund managers and asset owners at the end of the day can only buy new things, be responsible with what they own, or choose not to own them anymore under certain conditions, and so the largest greenwashing of all is business as usual.

ESG is not greenwashing, except when it is.