Has ESG Gone Off the Rails?

By Sharon Bentley-Hamlyn, Director at Aubrey Capital Management.

As an investment firm that has taken into consideration environmental, social, and governance factors for over a decade, with close attention being paid since our founding in 2006 to corporate social responsibility, e.g. good governance, anti-corruption and bribery, and “putting something back” into communities, I am becoming increasingly queasy about the direction of travel of so-called ESG.

In an article back in March, The parlous state of ESG, I lamented that what might have been a framework to encourage more ethical investing had become a bureaucratic nightmare of box-ticking, supported by a ratings industry that has helped large investment management companies greenwash their funds.

It looks now as if ESG is becoming something much worse, because it appears to have been hi-jacked by social and environmental ‘activists’, in addition to the bureaucracy.

Are there any other ‘ESG’ investors out there feeling similarly disconcerted by this turn of events?

By way of example, our firm strongly supports getting more women and girls to consider investment management as a career, and we have a good gender balance in our company. However, there are several well-run businesses in our investment universe that are downgraded in the sustainability ratings because women do not yet comprise one-third of their boards.

In principle it would be great to have this level of female participation, assuming women can be found, who are qualified and competent for board roles. But in our experience of speaking with senior management in a wide range of industries, this is not so easy to achieve.

There simply are not enough qualified women coming forward for such roles, or indeed entering certain industries and progressing to this level. Should we desist from investing in such companies, which are otherwise providing a useful economic and social function? The same comment might apply to any other underrepresented minority.

The Market Will Dictate Which Energy We Use

While encouragement is fine, when regulation starts to become coercive, then there is a problem. Investors withdraw or vote against management in AGMs because companies are not fulfilling certain social criteria. Corporations start to espouse political ideologies and use their capital to force social outcomes. 

You get into situations, as in the UK, where basic services, like banking, can be denied to individuals, small businesses, and organisations whose views may not concur with a company’s political or sociological stance. Companies themselves feel pressured to fulfil certain criteria, even if it is not in their or their shareholders’ economic interest to do so.

The same goes for climate-related targets. While most people would be completely onside with treating our planet with more care, this needs to be balanced with treating individuals with the same respect. Targets for net zero may appear laudable, but what will be the repercussions for individuals and businesses?

I am not sure anyone has come up with an accurate assessment, but one suspects the effects will not all be good. Having access to affordable energy is crucial to individual, as well as corporate and national well-being. It is about achieving the right balance, and when we start getting ‘diktats’ as to where we can travel, what mode of transport we can use etc, we can be pretty sure we will not achieve the balance most of us seek.  

As it happens, since 2014 in our European Strategy, we have chosen only to invest in renewable energy, and then only in certain types, as some can be environmentally damaging. We concede that our societies cannot currently function without conventional energy. Still, we believe that the decision of where to invest should be left to individual investors, and not dictated by bureaucrats and pressure groups.

The passage of time and the logic of the market will eventually dictate which types of energy we should be using and in a far more balanced way than governments, the bureaucracy, or indeed ESG ever can.