ESG has been come under scrutiny over the past 12 months under pressure from some US Republican politicians who have called on asset managers to move their clients’ money out of ESG-focused investments.
Simply put, their argument is that ESG prevents investors from accessing assets such as fossil fuels, thereby missing out on the skyrocketing valuations of fossil fuel companies brought about by rising energy prices. ESG opponents argue that continuing to follow ESG doctrine in today’s market is therefore a breach of the fiduciary duty of asset managers.
This of course overlooks one rather fundamental challenge: the Intergovernmental Panel on Climate Change (IPCC) in its recent AR6 report stated that the G7 economies must reach net zero by 2040, not 2050, if we are to avoid catastrophic climate change.
At the United Nations Climate Change Conference in 2021, countries pledged to reduce their use of oil and fossil fuels. The IPCC’s latest scientific review sets the tone for a future climate change conference (not too far in the future) promising to expand fossil fuels and accelerate already significant investment in an electrified and low-carbon future .
Whether you believe in ESG or subscribe to the ‘wake capitalism’ stance, you just can’t ignore it.
So the fiduciary duty of asset managers, seen through that lens, would suggest a long-term need to ensure that the funds they manage are not subsumed into assets that become stranded or obsolete. In other words, investing using ESG metrics and favoring investments in renewable and climate technologies makes long-term economic and investment sense.
This approach is one we are taking, and we are not alone. Despite the recent controversy, the ESG investment market is estimated to be worth $53 trillion globally by 2025 and data, reported by Bloomberg, from the European Fund and Asset Management Association (EFAMA) has shown that the EU’s highest environmental, social and governance classification, known as Article 9, raised €26 billion ($28 billion) in 2022. That coincided with bond funds seeing greater customer outflows than since the global financial crisis in 2008, while equity funds also suffered, losing €72 billion over the same period.