For the last column of Not Financial Times, I could have thought of a more classy title. But maybe, with all the reminiscing being a senior brings, I wonder for the future of investing if we really put our minds and money towards “ethical” environmental-, social-, and governance-aware (ESG) companies.
BlackRock’s Larry Fink, who has been one of the most influential advocates for sustainable investing, emphasizes “$19 billion of sustainable flows,” despite a 7% drop in ESG returns across large-cap funds in the first quarter. To those who argue recent administrative actions counter sustainability goals, Fink states that “energy transition isn’t a straight line. It’s a 30- to 50-year time frame for us to move that forward.” Admirable, but with the latest UN report on the climate, it seems like we should have done these transitions a long time ago, right?
Peter Thiel, a well-known venture capitalist and co-founder of Paypal and Palantir Technologies, had extremely strong arguments against ESG investing at the 2022 Miami Bitcoin conference. He was mainly driven by how “hypocritical” it seemed that bitcoin mining was being targeted for being environmentally unfriendly by governments and certain institutions. If we were to look at other material mining companies, say cobalt, (a resource used in rechargeable batteries today for electric vehicles) these have had human rights violations for years, but are seemingly hushed because they are critical elements in the supply chains of “green” technology. Something to think about…
When it comes to ESG, many people (me) point toward the concerns that there is no universal “standard” like there is for financial reporting for companies to follow. Ventures can provide a lofty or critical perception of how they are treating their employees and the environment.
There are quite a few frameworks, and there are advisory firms like VentureESG, that help early stage ventures be on track before their IPO—before it’s “too late,” or “risky,” to falter on claims. Europe is best known for ESG integration in venture capital (VC), where more than “70% of VCs consider ESG in their investment decision-making process.” Business planning is really important for early-stage ventures, and those that incorporate ESG early in their development are likely to supersede their peers in the space.
This past quarter has been sighted by many as a “test” for ESG investing because of the attractive returns in traditional energy and defense sectors. A quarter performance is not enough to make or break an investment thesis, and Fink may be right that we still have years ahead of us. That being said, Thiel also has a point that maybe these environmental investments are “sort of fake?”
A recent paper published in Institutional Investor by Kenneth P. Pucker and Dr. Andrew A. King suggests that alongside the lack of alpha (excess returns investors expect) provided by ESG, these funds “represent a marketing-induced trend that will neither benefit the planet nor provide investors with higher returns.” What really surprised me in their findings was that major funds held similar technology companies, even if their ESG focus differed. For a while that didn’t make sense to me, until I saw that the majority of these ESG funds hold at least 25% weight in large-cap technology stocks. This maybe explains why more than uncertainty in the market, inflation and rising interest rates seem to weigh down heavily on ESG returns.
Photo courtesy of Institutional Investor. Common technology companies like Microsoft and Alphabet are prevalent in ESG funds, even though the funds have differing focuses i.e. Carbon Intensity or Engagement.
Despite the bully pulpit these companies have, I am pretty sure there are many publicly listed companies that are more sustainable.
No matter what I look into, I am still at odds with the best measure to quantify sustainability. Yes, there are carbon offsets/credits—but is it idealistic of me to want something better that can make improvements at scale? As an investor, I know that there is always something in a business’s social culture that leads them to be more or less profitable.“Doing good” is seen and felt, but it’s financial performance that leads to a buy or sell decision. I can’t disagree that money may always favor the big and brave. I can’t disagree that “dirty” energy continues to run the world; more than 80% of the world’s energy today is still powered by fossil fuels.
ESG is nothing new in finance—even though there is no standard to quantify sustainability, the pursuit of righteousness continues to be a journey worth following.
Till then, an ode to the good old days.
Not Financial Times (NFT) is an Opinion column created by Roshni Revankar ‘22 to share insights and research into students’ favorite companies, industry trends, and anything in financial markets that really irks their curiosity.
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