It looks like the financial sector has rediscovered its social responsibility. Banks want to be allies in the fight against climate change, fund companies want to accelerate the green restructuring of the economy. The answer of the financial industry in dealing with the ecological and social challenges of this century is “ESG”: Environment, Social, Governance – environment, social and good corporate governance. The acronym stands for new, not directly financial criteria by which listed companies are judged today. It is no longer just profit, loss and growth that should count, but also whether companies operate in an environmentally and climate-friendly manner or pay attention to the concerns of workers in their value chain. Much of this also affects financial metrics.
Rating agencies calculate such variables in point systems and make them usable; Fund companies are increasingly selling green products on this basis. All of a sudden, benefactors seem to be at work in the world’s financial centers, especially in the area of asset management. Sustainable investing is what consultants call “mega-issue”. But the truth also includes: ESG is to a large extent a mega-marketing lie with which the financial industry is justifiably beautifying its battered image.
Because despite all the efforts of bodies in the EU (where the debate about the so-called taxonomy shows this strikingly), the USA and at the international level, no binding, generally applicable definitions for ESG criteria are in sight. That is also in the nature of things: the CO₂ footprint of companies can be measured; high carbon dioxide emissions are generally bad. And it means a material risk: Emission-intensive companies run into economic problems when greenhouse gases become more and more expensive.
Social criteria are much more difficult to assess in internationally integrated supply chains; Apart from criminal and competition law, the rules of good corporate governance are only laid down in codes and vary greatly depending on the region of the world. The financial implications of such sizes are ambiguous. And are nuclear power plants environmentally friendly because they have low emissions – or because of the incalculable risks? The member states of the EU are proving how long one can argue about such things.
If one wants to express this in numbers, value judgments must necessarily precede it. In free societies even the attempt at a generally valid definition of a “common good” fails. How should one use ESG criteria to map what contribution a group makes to the general good?
A supposed organic seal
There’s no one good answer to that, which is why today’s ESG ratings are extremely weak. Aggregating a wild mix of easily measurable data and value-based criteria from three different subject areas cannot provide reliable figures. Depending on the provider, the ratings are accordingly contradicting. Nevertheless, the fund industry has managed to get its customers to perceive ESG labels like organic labels.
The core business of money managers will not change due to the ESG trend: They protect and increase the assets of their investors. Making the world a better place would be a very different job assignment, and potentially at odds with a business model that is geared towards profit and growth. Depending on the research, it improves or diminishes long-term performance when fund managers pay attention to ESG criteria. In the best-case scenario, it means that more sustainability does not mean foregoing returns.
The shares of certain companies – such as arms manufacturers, tobacco or oil companies – are typically excluded from sustainable funds. Here, too, there is arbitrariness, you have to go through prospectuses intensively in order to understand the systematics of individual funds. Also, not buying certain stocks doesn’t change anything because they only belong to others. Only when the majority of shareholders agreed on generally binding criteria would that have the desired effect: forcing companies to change their business behavior through poor share price development. That is played very much over the gang.
After all, with ESG funds, private investors buy the reassuring feeling that they are not making money from the business success of companies that reject them. Funds bearing the ESG label make no direct contribution to environmental protection and a fairer world. It is wiser to continue to only pay attention to cost and quality when it comes to financial products. A commitment to people and nature fits better into other areas of life, and targeted donations have a far greater effect than high fees for an overrated ESG seal.