As hype grows, ESG skepticism rises too

As funds focused on environmental, social and governance (ESG) issues become ubiquitous, attracting large inflows, more investors are becoming skeptical that issuers can meet sustainability targets and offer strong returns.

A panel at the Portfolio Management Association of Canada’s national conference on Thursday put the challenge bluntly: Is green growth a fairy tale?

For the next 10 to 15 years, it is, said Financial Times columnist Simon Kuper. The economic sacrifices required to reach net-zero carbon emissions in a short period are too great, and would put an end to things wealthy consumers demand such as Amazon packages and aviation.

“Maybe one day we can have green and growth together,” Kuper said. “In our generation we can’t.”

Craig Noble, managing partner and CEO, alternative investments, with Brookfield Asset Management, was far more optimistic. He noted massive shifts in renewable energy use and, just as significantly, in political will and corporate mindsets.

“I understand the skepticism because we’ve all been too slow,” Noble said. But the consequences of not reaching net-zero targets are greater than the pain of transitioning over the next few years, he said. “The price that will be paid farther down the road is just far too high.”

Jessica Huang, director and head of sustainable investment solutions for the Americas with BlackRock Inc., said climate scenario modelling demonstrates that “the net zero transition is just a better outcome for investors in general.”

Huang described investor appetite for ESG funds, as demonstrated by asset flows, as “pretty shocking.”

Investment funds won’t achieve net zero at the micro level but they can have a huge effect at the macro level by moving capital to companies preparing for the energy transition, she said. For example, more investment can bring down the “green premium” for new technologies such as carbon capture and storage.

Capital markets aren’t going to solve everything, Huang said, “but they are an important player in terms of moving the broader economy to net zero.”

Still, a recent report from Chicago-based public relations firm Edelman demonstrated widespread skepticism about ESG. In a survey of 700 institutional investors (100 in Canada) in August and September, 82% said companies frequently exaggerate their ESG progress (77% in Canada).

Almost three-quarters of investors said they don’t believe companies will meet their ESG or sustainability commitments, and a similar percentage (79% globally, 71% in Canada) were concerned companies aren’t meeting net-zero pledges.

As a result, most investors (87% globally, 82% in Canada) anticipate an increase in ESG-related litigation.

Investors were also more skeptical than a year ago that companies prioritizing ESG integration would deliver stronger returns.

A large majority of respondents to the Edelman survey (85% globally, 78% in Canada) favoured mandatory ESG disclosures, but didn’t agree on which framework to use. The Canadian Securities Administrators released proposals last month to mandate issuer disclosures roughly in line with the Task Force of Climate-Related Financial Disclosure (TCFD) framework.

Fund labelling rules took effect in Europe earlier this year. Huang said that while nothing has been mandated elsewhere, there’s a trend across regulators focusing on disclosures to prevent greenwashing. In North America, the focus has so far been on issuers rather than funds.

“If corporates aren’t disclosing this information, how can fund managers be reporting on it?” Huang said. “One of the things that will hopefully be different in the U.S. and Canada is that the regulators will first focus on issuer disclosures and then focus on fund disclosures. For the most part that’s the direction that we see regulators taking.”

Until those rules take effect, however, there will be room for the skeptics. Kuper said he expects the world to reach net-zero emissions — but to do so far too late.

As for investment funds, “Nobody expects ESG to save the world,” he said. Investors who want to save the world need to be more radical, he added, restricting themselves to impact investments where they’re prepared to lose money.