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Hugh Wheelan: why ESG investors are not job killers, despite what the headlines say

However, we have some serious philosophical and practical points to clear up

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I’ve read a seriously large amount of poor journalism about ESG/responsible investment in my time - and I do my best to ignore 99.99% of it. 

The articles usually show far more about the writer’s prejudices than they do any honest intent to engage, understand, research properly or investigate.

But a headline last week on Bloomberg tipped me over the edge…

It read: “ESG Investing Is Having a Good Crisis. It's Also Killing Jobs”.

That’s right, reader. You...and I...are now job killers! 

And I guess that as a Co-founder of Responsible Investor, I am the journalistic equivalent, in employment destruction terms, of the driverless car.

I can add that to the panoply of criticism we’ve had over the years: naive, uneducated, financially illiterate, tree-huggers, religious zealots, socialists.

I'm almost embarrassed to respond to a click-bait headline, but I’m only human. And there are moments when one must take a good look at what is behind the hyperbole, consider it properly, and stand up to critique where necessary. 

But, when I see that the piece is written by John Authers, former Lex column chief on the FT and a writer that I respect... well, by now I figure the game is up and I’d better turn myself in for crimes I could not know of nor foresee; une crime de passion, Your Honour.  

Sadly, of course, as with much of today’s media, the headline bait undergoes something of a switch in the text; sometimes editors and production staff get carried away in their titular embellishments. 

The piece - based primarily on a short research paper by Vincent Deluard, Global Macro Strategist at INTL FCStone, the US financial services group - puts together some interesting data points and reflections, albeit via what I would argue are a series of generalisations and inferential leaps that lead us to that murderous Bloomberg headline. 

En gros - as they say in France - both the research and the article look at a set of ESG-labelled ETFs and show that during the crisis flows into equity and green bond ETFs have remained strong, and equity performance has been relatively good compared to a benchmark index and a value tilt of the index, but slightly below the growth tilt of the same. 

Results are similar for the US, Europe and Japan.

We can’t say why allocations have stayed strong to ESG ETFs; maybe a values-based retention? 

But, on the performance, as Deluard notes in his research paper, the ETFs in question have a clear bias to the healthcare and tech sectors that have run returns in recent months.

I spoke to Deluard, and he told me he looked at a sample of 10 ESG ETFs.

He said this was the first bit of research he’d done on ESG funds, and did so because he was interested to see why they were maintaining assets and performing well in a crisis.

He quotes Victor Hugo in his intro: “Nothing is stronger than an idea whose time has come”. 

Well, is it, he asks?

So far, so reasonable; although maybe a little light on source data.

Then we get the ‘killer’ stat: the stocks held in the ESG ETFs have 20% less staff than the Russell 3000 index, and so capital is being deployed  - albeit unintendedly, as Deluard notes - towards companies whose business models are labour light.  

From there, we get the conclusion that ‘ESG’ (note the shift to ESG as a whole, not ESG ETFs) is an unwitting angel of death for jobs. 

Now, most people won’t need me to point out that correlation is not causation; and here you’d have to believe that, theoretically, ESG ETFs exercise sufficient cost of capital influence, before you even get to the question of who or what actually influences job creation or destruction? (The subject of more books than most of us have had hot dinners).

However, ESG ETFs, in my experience, make very few (if any) claims on job creation: most have a simple sin screen on weapons, tobacco and degrees of fossil fuel allocation. 

The sector bias is likely explained here; and it’s a known phenomenon. It’s a fairly straightforward ethical choice for the investor, and performance will fluctuate. Caveat emptor.

But, as Authers’  Bloomberg article suggests, there’s actually a lot to consider in what is going on here; not least the critique that ESG lacks ‘definition’.

It certainly does in both Deluard’s research note and Authers’  piece.

As Authers notes: “ESG has another problem. How exactly is it to be defined? Any number of different financial data groups offer their own ratings, while a number of investment houses have created their own proprietary versions. That competition has created confusion.”

This is a version of a regular critique of ESG: firstly that it must have a clear ‘definition’, and secondly that divergence in data and research implies that it is not serious finance.

On the first point, ESG is a signpost that sustainability criteria are being deployed in an investment product and, as with all investment products, buyers should be aware of what they are buying. 

Transparency in all financial products should be better (and we are a long way from good on that). Does the term ESG or responsible/sustainable get abused by marketeers? Yes. Show me a term that doesn’t: ‘healthy’, anyone?

And did you ever hear anyone say ‘hedge funds’ have a definition problem because macro or event-driven strategies aren’t the same?

The second point of ‘difference’ in ratings and data, is a bit confused, really: this happens in all research. If you don’t want it, don’t buy it. If it has no investment rationale, don’t research it. I take the point a bit in terms of index construction and ratings, but again, no-one is being coerced here. And we really won’t see data comparability until it is legally mandated; like with the numbers. That’s a big debate, but one that is moving forward apace, particularly at the EU level. 

Deluard finishes his research piece citing Saint Augustine’s 5th Century observation from “the City of God”, that the physical world is messy, chaotic and sinful. 

He concludes: “ESG’s insistence of virtue is ultimately orthogonal with humans’ fallen nature. Only angels and robots never sin. ESG investors unwillingly pave the way for a perfect world which has no place for humans.”

That’s a heavy spiritual charge against ESG! 

But, strangely, I think it does, in a way, encapsulate some of the critique of responsible investment; that somehow this is all a giant ‘virtue signal’ in an imperfect world, and that societal progress has somehow become futile in the face of the market god (quick nurse, the medication!)    

Any good article/journalist though, should raise fundamental questions, and this one does; if indirectly, in my opinion.

What is ESG, what it is not, and what is it for? 

Is it making any difference?

Can ESG make a difference if it operates within the existing financial system?

What data should be provided by companies and investors to answer the issue of environmental and social costs or ‘externalities’, and how should that dovetail with finance? 

These are questions (and there are many others) that are much too long and complex to take on here. But we need to. I’m going to do my best to corral my own thoughts and those of others on these subjects over the summer.

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