Who killed the ESG party? | FT Film

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ESG was everywhere. Now, 2024, tumbleweed. Was it all just a meaningless marketing exercise, or has the way people invest our pensions and our savings, has that genuinely changed?

ESG is the next evolution of capitalism.

When we talk about ESG, we are talking about the future of humankind.

The story of ESG is a multi-trillion-dollar marketing scheme.

It's a story about hype, ambition.

Humanity responding to a set of inconvenient truths with something short of real solutions.

The ESG hype cycle is over.

Those three letters may even disappear, and we're going to move to a much, much better place because of it.

ESG is trying to think of ways to invest money in companies, whether they are company bonds or stocks, in a way that helps the environment rather than hurts it, in a way that advances social aims rather than harms them, in a way that encourages companies to be governed properly, soundly, with lots of checks and balances, and with appropriate controls. So the E is environmental, the S is social, and the G is governance.

The term became trendy in the aftermath of the Paris agreements in 2015 to keep global warming well below 2 degrees above pre-industrial levels. There was quickly a realisation that the private sector would have to play its part in that.

I'm Nicolai Tangen and I'm the CEO of the Norwegian Sovereign Wealth Fund. We run $1.6tn and we own roughly 1.5 per cent of all the listed equities around the world. ESG is very, very important. Climate is a financial risk. Now, we are invested in all the companies across the world. And so if one company pollutes we will pick it up in the rest of the portfolio. If you have a long-term view and you really care about both the climate and the financial returns, you have to care about these things.

There was a period, in the late 2010s, when I couldn't pick up the phone or open up my email without being bombarded with people just desperate to talk to me about their ESG credentials. And now, 2024, tumbleweed. It does not come up in conversation at all.

The excitement around ESG reached its peak in 2021; the COP26 climate conference in Glasgow in the UK. There was a big announcement, the Glasgow Financial Alliance for Net Zero. Most of the biggest financial institutions in the western world declared their support for efforts to reach net zero carbon emission. But there is a big difference between declaring one's support and actually acting on it.

I feel the ESG hype cycle is over. I think we are at that point of disillusionment.

The ESG party as we know it is over. So I would think about the ESG industry as having produced some good things that we need to keep, some bad things we don't.

ESG is here to stay, but it's not going to be a linear journey.

The question is: who killed the ESG party? There's a number of suspects.

Our first suspect is Vladimir Putin.

One of the really big moments for the ESG industry was that invasion of Ukraine.

Higher hydrocarbon prices just following the Ukraine invasion. The higher costs of capital with the increase in interest rates have hurt the performance of ESG-driven strategies.

So if you're an ESG investor during that period then you are dramatically underperforming the wider market, which is being buoyed by oil and gas stocks.

Russia's invasion of Ukraine had the effect of putting more focus on energy security and safety rather than thinking about climate.

While markets were going up and everyone was safe, we could spend all our time arguing about ES&G. As soon as the world got scarier, add a bit of Covid plus a bit of geopolitical tension, war, warheads, invasion, tanks, suddenly, we all woke up and went, boy, oh, boy, this stuff is immaterial compared to what's going on in the real world.

Surely, it makes sense to help fund the companies that provide the ammunition that countries need to defend themselves from hostile actors. And this was one of the things that made people think, hang on, did these criteria actually make any sense?

People forget that the oil and gas sector, the energy sector, has underperformed the S&P 500 for the last 10 years. People keep waiting for the last hurrah. When will it finally make me more money than my tech investments? And the war in Ukraine, you get this spike. Get off of fossil fuels. If they're the cause of the problems, move quickly away from the cartel of fossil fuel providers and move to this new system, wind and solar. If you can capture it and store it and you can make it at source, you don't need to be transporting it around the world, having wars intervening with your pipelines and so on.

Our next suspect is Tucker Carlson.

He was instrumental in leading this US political backlash against ESG.

Because of ESG, Germany is now rationing electricity. Because of ESG farmers are in revolt in the Netherlands.

Carlson is arguably more responsible than any other individual for dragging ESG into the heart of the culture wars. Carlson helped to move the political needle in such a way that we've now seen very high-profile politicians, notably Florida governor Ron DeSantis, talking about ESG all the time.

We've seen financial institutions under really quite serious pressure, through various means, including withdrawing billions of dollars in portfolio assets from certain asset managers, which is what some Republican state governments have been doing. It's not really that surprising, therefore, that a lot of them are at the very least going a lot quieter on all this ESG promotional stuff.

Separately to GFANZ, there's been another initiative, also very important, called Climate Action 100+, asset managers using their clout to put pressure on the companies that they invest in. The first phase was very much focusing on disclosures. Second phase was what companies were actually doing. So we're no longer just talking about disclosing data. We're talking about companies taking action to reduce their emissions.

Some of the members, particularly US members, BlackRock, JPMorgan Asset Management, Pimco, Invesco, State Street, at this point they got worried. It might not be in the interests of their clients, of their investors, for these asset managers to be telling all these companies to reduce their emissions.

BlackRock, which is by far the biggest asset management company in the world, became a central part of this story, partly due to the role played by its chief executive, Larry Fink. There was a period when he seemed to be arguably the most prominent standard bearer for ESG.

Larry's vision around how we can use the gears of capitalism to fix its own shortcomings, capital starts to flow towards more responsible providers in society. This was all a very alluring thesis, because you make money and you improve the world at the same time.

BlackRock, and Larry Fink in particular, became really central targets for those political and media attacks, especially from the right. BlackRock has certainly become less vocal around ESG. In fact, Larry Fink now says that he prefers not to use that term.

Do I think he's one of the bad guys? I don't. They've created some of the biggest clean energy funds in the world that are making money for their investors. That's their job. They do that very, very well, with a lot of pressure on him politically. Yeah. And did he fold a little bit? Yes, he did. But I think anybody under that kind of pressure would have responded in the same human way.

In 2022, Northern Trust put out one of its regular surveys to get an idea of what the priorities are for asset managers. And in 2022, at the start of that year, before Russia's invasion of Ukraine, ESG was top of the list. 2024, it has absolutely dropped down the list.

In Europe, there is far more support from government regulations. Public opinion is probably more positive on sustainability.

The oil and gas industry is simply a bigger part of the economy in the US than it is in Europe. There is a much higher proportion of the population in the US who question the science of climate change.

The change we've seen in the US is worrisome, because there is less focus on the climate initiatives that the companies take. It has not changed the way we do our business. We have roughly 3,000 meetings with companies every year. We would discuss governance, and of course, also, climate. We vote at roughly 12,000 AGMs every year on 120,000 proposals.

Even though we only account for 1.5 per cent of all the votes in the world, we also see that we have roughly an additional 3 percentage points of kind of additional influence, i.e., other shareholders who follow what we do.

And we've also seen, in terms of the flows of money, we've seen bigger changes in the US than in Europe. Some in the asset management industry saw the rise of ESG as a great opportunity. Inflows into ESG funds were really, really strong on both sides of the Atlantic.

In the first quarter of 2024 we still saw inflows into sustainability-focused funds in Europe to the tune of something like $11bn, whereas in the US it was the single worst quarter that Morningstar has recorded. Nearly $9bn came out of sustainability funds. E, S, and G are three letters that do not leave your mouth if you are on marketing trips across various states in the US, if you're an asset management firm.

Do I think the big asset managers helped end the party? No. I think big asset managers smell the wind, and if they think there's a backlash, they'll be very, very fast to change course.

Tariq Fancy, previously the chief investment officer for sustainable investing at BlackRock, has since become a vocal critic of the approach to ESG that's been taken in large parts of the asset management and financial industry.

The ESG thesis around society improving because companies discover social purpose, it's a free market self-corrects thesis. It's a neoliberal, the free market will figure this out because people will have new data frameworks and companies will start to do the right thing on their own. If you're a consumer-facing brand, it's not a good idea to have a supply chain issue with slave labour.

But for the majority of the companies in the economy it doesn't really matter. The reality is, they're going to do whatever the cheapest thing they can do is, and they're going to do that within the rules. And I don't think that we should impugn business people for making the decisions that are in the interest of their shareholders. They're playing the game exactly the way they should be.

And his argument is that the appropriate response to climate change and these other challenges must involve policy from democratically accountable governments.

What do we actually need to do to address some of these problems, and where does that incur short-term sacrifice, and how do we impose those sacrifices in a way that's mandatory and systemic?

Maybe, in the absence of serious government action, there is a real tension between fiduciary duty and the kind of action that Climate Action 100+ was calling for.

You should have a reasonable expectation that wherever you've got your pension money parked, someone, somewhere is doing the best possible job they can to make as much money for you as possible.

How would you feel if the asset manager running your pension plan made certain ESG assumptions that you don't agree with? And what happens if those assumptions are wrong, they're too severe, and that actually costs you 2 per cent to 3 per cent a year on financial performance?

I think climate risk... the challenge is that it's quite long-term. So a lot of investment strategies have a horizon that really doesn't think about the long term.

If you are a short-term hedge fund, you're going to own the securities for 24 hours. You may not care. But if you are a universal owner that is going to own that securities for 50 years, you are going to care immensely about what's going to happen to that company.

In 30 years' time, we could be through 2 degrees. We could be past tipping points. We could be in climate chaos. Investing to avoid that happening is the most responsible thing you could do as a fiduciary.

We have one overriding goal with this firm, and that is to make money. Climate is a financial risk. You need to take it into consideration in order to fulfil your fiduciary duty to your investors.

Another suspect would be Desiree Fixler.

Desiree Fixler was the head of ESG at DWS, big German asset management company spun out of Deutsche Bank.

She really exposed the practical problems that big investment firms have measuring this investment for good and proving this investment for good.

There was a tremendous gap between what the company was saying publicly about their ESG capabilities to what they were actually doing internally. You can't mislead your shareholders and investors. You can't misrepresent. And you certainly can't mis-sell your products.

Wirecard was placed as a top position in a DWS ESG flagship fund in 2020. So at a time when E&Y won't sign off on their financials, DWS actually upgrades Wirecard on better corporate governance and cites business ethics. Marcus Brown, the CEO of Wirecard, has been arrested, Jan Marsalek is on the run, and the company is insolvent.

There was a statement once made from a CEO: "You and your American friends are paranoid." My American friends? Is he talking about the SEC and the DoJ? I was a tremendous pain in the ass. I just didn't stop. And finally, at my last board meeting, I pretty much banged on the table that these are urgent issues. It was a matter of a few weeks later I got fired.

I knew that greenwashing was absolutely pervasive in the market. ESG became a huge marketing tool for other asset managers. I knew that most of the claims out there were bullshit. I decided to go public. I had documents. I had evidence.

It's really been one of the most impactful whistleblower allegations. There was a high-profile raid by authorities in Germany on a DWS office. DWS dramatically reduced the quantity of assets that it's claimed to manage under ESG principles.

I know that I definitely contributed to killing this ESG party.

One of the biggest problems with ESG is, how do you measure this stuff? That's created an opportunity for ratings and index providers, the biggest of which, in the ESG space, is a company called MSCI.

So an ESG rating is an opinion, how those variables will impact the financials of that company.

The way that I want to measure it will almost certainly be different from the way that you would want to measure it.

We're going to arrive at different opinions. We're going to arrive at a different rating.

Because we're not just talking about climate stuff. We're also talking about social stuff and governance stuff.

Different ways of measuring virtue come up with different results.

It is something that will develop over time. Clearly, it takes effort to understand those characteristics. And it will take even more to price those characteristics into the value of assets and to the allocation of capital.

I've had many conversations with clients where they were very confused by some of the rating agencies, where the same company was rated very highly by one agency and very poorly by another agency.

Controversy around that industry has led to growing calls to regulate them, and we're seeing movement around that, particularly in the EU.

You cannot regulate ratings themselves. Regulation on ESG has to be more on the ingredients that you're using to come up with a rating. If I'm an investor and I look at an opinion by MSCI, and I look at opinion by others, and then I form my own opinion, that's a richer world than simply somebody giving it to you directly.

When you go buy a product in a supermarket it's going to tell you what the ingredients are, how much salt they have, how much sugar, how much fat and other sources. You're not going to tell people whether they should eat the sausage. That is a free choice in a society.

There is a need to scrutinise data. But in the end, when it comes to opinions rather than data, diversity of opinion actually enhances the investment process.

It's not really possible to prove whether a company is completely green. What if the product that it produces is green, but that further down the supply chain, the other companies that it relies on, what if they don't quite meet the same criteria? What if they're not quite as virtuous as the ultimate company that an investor is choosing to invest in?

ESG is an umbrella term, and it means many different things to different people. It can be a risk management feature, how the outside, changing world might affect the company you're investing in. It can also mean how the company you're investing in affects the outside world.

The idea was that you take ES&G factors into consideration when you look at a stock or a bond or an asset. But that morphed in people's minds to thinking that ESG is a measure of a company's goodness. Does it do the right thing by the environment? Does it have a nice culture? Is its governance any good? And if I buy a company with a good ESG score, I'm buying a good company. That is nonsense.

ESG is not about doing good. It's about being a long-term, sensible investor. If you're a long-term shareholder and you care about financial returns, you need to care about the climate as well, because the climate effects, for instance, on inflation is stronger than it's ever been before. We see it in harvests. We see it in reinsurance premiums.

You need to care about executive pay because you want to have a sustainable situation. You need to care about diversity at board level because those boards with better diversity generally perform better.

What does climate have to do with labour laws in a certain country or diversity and inclusion? So an alert system morphed into an investment strategy. Those are two very different concepts. One is risk management. The other one is positive impact.

If something has an ESG label on it, my mum will think it must be full of good companies. No. I might go in to a client and show them a company that they think is bad. And they'll go: you've got an oil company or an airline or a cement company in your portfolio. It's got a low ESG score. Why is that? And I'll say, well, it's so cheap that it takes those risks into consideration, and we think it's an attractive investment. I'm using definition one, they are using definition two, and we don't understand each other. And that is a fundamental problem that is still around in the industry.

It was sort of smashing together a bunch of things that are unrelated so that you can have a very simple, single indicator of virtue while minimising tracking error against an index. And the goal is, ultimately, if you could figure out how to take your product and make a few changes such that the return dynamics are the same or very similar, but you have a slightly greener basket which might just mean, as we saw, underweighting fossil fuel players and then overweighting tech companies.

And what Wall Street played on dressing up risk management products on well-run companies, investors were thinking they were investing in portfolios that were offering environmental and social benefits. That wasn't the case at all.

Our final suspect is Stuart Kirk. Stuart Kirk worked as an FT journalist and then went on to work as the head of responsible investing at HSBC Asset Management. And he was in that role when he came to give a short speech at an FT Moral Money conference in London.

Sharon said, we are not going to survive. And indeed, no one ran from the room. In fact, most of you barely looked up from your mobile phones at the prospect of non-survival. The Sharons and the Mark Carneys of this world need to tell us why prices are going up with our own demise.

I was in the room when he made that presentation. It did go down like a cup of cold sick. He did open up a conversation around the inconsistencies that are inherent in ESG that wasn't previously there. So he has to take a share of the blame here, I'm afraid. And I don't think he imagined that it would gain quite as much momentum as it did or lose him his job.

To be suspended straight away is discombobulating. And I still have not, to this day, spoken to any of my colleagues. Horrendously stressful for anyone who does this for a living, anyone who's got four children, anyone who's got a sensible job and has tried to work hard and do the best they can for their employer, which I've always done.

Now, I've been through a lot of bubbles - dotcom bubbles, emerging market bubbles. You could always say stocks were overvalued. I think this is nonsense. Here's another viewpoint. And you would debate it within a firm. Never in my life have I been in a bubble where you could not critique it at all with risk of losing your job. If my sacrifice was worth anything, it was allowing people, for the first time, to voice legitimate and necessary criticisms of something which needed to be open. And I know that from the thousands of emails I got from people saying, I was also fired for making a mild criticism of ESG.

Over the past 200 or 300 years, global growth, global development exploded based on a fossil fuel foundation. We've now realised that fossil fuels are cooking the planet and we have to move as rapidly as possible to the post-fossil fuel age. That's the future. Enormous fortunes will be won and lost as part of this.

We need to create new, low-carbon performance benchmarks, and that requires a complete rethink by pension fund trustees to reflect this world that we need to build instead of reflecting the world that we're trying to exit.

What has gone out of fashion is the term ESG. And maybe that's a good thing. This shouldn't be a party.

We are not talking about a party, or not a party. We are talking about the future of humankind.

A lot of the same financial institutions that are telling us to rely on ESG are active behind the scenes, taking advantage of traceless and often limitless political spending to influence policymaking.

We will not be speaking of ESG any more 5, 10 years from now. And that is because sustainability will be embedded in how we invest.

What I call option one, ESG as an input, will just melt into the existing investment process and will just disappear, because everyone will realise we should all be doing that anyway. The exciting thing will turn to the goodness scores, and funds will be properly labelled, and they will have a big thing on the top saying, this goodness may affect your returns. And someone will go, you know what? I don't mind 4.5 per cent instead of 6 per cent. And they will choose those funds legitimately and everyone will be happy.

For anybody to think or say that ESG is dead, that ESG is not going anywhere, that it was just a label, that it's just a political philosophy, I'm sorry to say, they're all wrong.

We think ESG is about as political as gravity. It's not political. It's about thinking long term. And it's about thinking about your returns.

This is the death knell for fossil fuels. And people holding oil and gas thinking that this is a long-term growth opportunity, they're going to get caught short.

The majority of Gen Z and millennials don't believe in capitalism. Leaders of that system stand up on a stage and they say: we know these are big problems. Climate change is critical. We have to solve them. And they talk about ESG and stakeholder capitalism. And every single year those young kids who, again, they didn't learn climate change is real because they watched a documentary years after they left school.

They learned it like we learn Newton and gravity. So they know it's real. They see the leaders of the system say, it's really important. We're going to do something about this. And every single year profits keep going up and the scientists tell us that we're getting further and further behind. There's a significant concern I have that we'll see political instability as people try to overthrow the economic system long before we actually get to 2050 and see if net zero actually plays out.

There is money to be made from the green transition. It makes perfect sense to put my pension money and yours into green technologies that are going to be used all over the world and that are essential if we're going to get ourselves out of this climate hole.

What's important is that serious work is done to really grapple with the challenges and the opportunities that we face. And those who do it right will be surfing the wave of the single biggest economic transformation, and one of the biggest opportunities in the whole history of human civilisation.