The City should get out of social activism as fast as possible
Nestlé is in the spotlight for still selling too many unhealthy snacks. Shell is in hot water for scaling down its green targets.
A Cambridge-led coalition of universities which collectively manage over £5bn of cash and investments last month warned banks and asset managers they will move their funds unless the money goes into greener companies.
And the Climate Action financial pressure group is demanding companies actively reduce emissions.
Most of us might have imagined that, with investors pulling out large sums of money and funds underperforming, the Environmental, Social and Governance (ESG) obsession was deflating fast.
It appears that the City of London hasn’t got the memo, however, and a correction is sorely needed. Social activism should be abandoned before it does any more damage.
Glancing through some of the headlines over the last few weeks, the “environmental, social and governance” crusade undertaken by many asset managers and banks shows little sign of abating.
The Swiss consumer goods giant Nestlé seemingly came under fire from Legal & General Investment Management, one of the UK’s largest asset managers.
The problem? Not the share price, which despite a rough few months is up by a respectable 750pc over the last 25 years. It is that the company is not moving quickly enough to phase out “unhealthy snacks”, and tackle the “obesity crisis”. LGIM, you see, has embarked on an ethical compliance drive.
Nestlé is far from alone. Shell was in trouble for watering down its commitment to reducing carbon emissions, and maintaining its investment in liquefied natural gas, with campaign group Reclaim Finance complaining it was a “retrograde step”.
In January, Europe’s largest asset manager Amundi was joined by 26 investors in demanding that Shell improve its environmental targets at its annual meeting.
Meanwhile, the Science Based Target Initiative has removed 1,000 companies, with a combined market value of $23 trillion, from its “validation process” for failing to move quickly enough to reduce carbon emissions.
Cambridge University’s pension funds are stepping up demands for higher education to use its financial muscle to force companies into line with its ideological objectives. The list goes on and on.
That is despite mounting evidence that the ESG bandwagon is coming off the rails. Sustainable funds saw a sharp fall in demand last year, with $2.3 billion of net outflows in 2023, the first fall since 2019 according to the data firm Calastone.
Over the last year, 28 ESG funds closed down, with another five abandoning their environmental mandate, according to Morningstar.
That is perhaps not unsurprising, given that many charge higher than average fees – all that flying around the world to climate change conferences costs money after all – for below average performance, with Morningstar reporting that “sustainable” funds recorded three percentage points lower returns than standard equity funds over the course of 2023.
Add it all up, and one point is surely clear. The ESG bubble has burst. The outsized returns some hoped it would deliver turned out to be a mirage. Companies have found ways of ensuring they scored healthy ESG ranking while doing little for the environment.
Some firms collected social responsibility accolades undeservedly: consider how Fujitsu was winning prizes for its social contribution despite its role in the Post Office scandal.
The project of turning the world’s major corporations into vehicles for social change was always doomed and ignored Friedman’s important doctrine: that the social responsibility of business is to increase its profits.
Here’s the problem, however. The City, or at least sections of it, has not got the message.
Instead it is doubling down on ever more absurd policies. It is hard to understand how Nestlé, a company that includes brands such as KitKat and Shreddies in its portfolio, is ever going to be the right organisation to lead a crusade to stop people eating processed snacks?
Sure, it might be better for everyone to eat a little more fresh fruit and veg, but it is ridiculous to expect a company that specialises in chocolate bars to drive that, and it is only going to damage its own business by doing so.
Likewise, there is no point in harassing oil firms who have worked out that fossil fuels will be around for a while. This isn’t to suggest that we shouldn’t decarbonise, but rather that LNG will play an important role while we transition to wind, solar and nuclear power.
The companies that have been exploring for oil and gas very successfully for a hundred years or more are, without question, the best people to deliver that.
Of course, some investors will put the environment before returns. But there is a growing tension now between the activist ESG officers who have been installed in well-paid positions in the finance world and those whose job it is to focus on the bottom line.
But how many Sustainability Managers and Corporate Responsibility Strategists does our economy need, especially if their jobs depend on finding flaws in corporate strategies?
Too many people in Britain today work in HR, compliance and legal, and like any bureaucracy, their teams become self-sustaining, expanding even after the initial rationale for their existence has faded away.
ESG doesn’t improve returns for investors, nor does it make companies inherently more virtuous. Often, it may not even change their behaviour significantly.
The asset management industry should get back to its core function, demanding that companies deliver decent returns to shareholders, pay their staff and suppliers fairly and promptly, and stay within the law.
The City should get out of social activism as fast as possible – before a thriving sector becomes more of an embarrassment.
