Recent news has cast a negative light on ESG investing, but guest writer Luma Saqqaf, a sustainable finance practitioner, explains why the current bad press could lead to a positive step forward.
An ESG backlash seems to have begun. Only a few weeks ago, Tesla CEO Elon Musk tweeted ”ESG is a scam” to his nearly 100-million followers after Tesla lost its place in the S&P 500 ESG Index – a ranking based on companies’ overall performance relating to financially material Environmental, Social and Governance factors (ESG). While 34 other companies were also removed from the list in the annual reshuffle, oil giant Exxon Mobil remained on the list, which Musk was quick to highlight as hypocrisy.
Musk’s denunciation of ESG seems to be just the beginning. A few weeks later, the Frankfurt offices of the DWS unit of Deutsche Bank hit the headlines when they were raided by police on suspicion of fraudulent advertising of its sustainable funds. In mid-June, reports claimed that ESG-themed investment funds by Goldman Sachs’ asset management division were currently being investigated. The media were quick to declare that ESG is ‘over’. But is that so?
Taking a step back, it has only been since 2015 that countries have started to pay real attention to, and therefore take action against, climate change and other sustainability issues such as biodiversity loss, social inequality and poverty. Governments have made pledges under the Paris Agreement in 2015, and in 2016 under the UN’s Sustainable Developments Goals (SDG’s) to achieve net-zero and the SDG’s by 2050 and 2030 respectively.
In practical terms, it is the combined efforts of businesses and civil society that will actually achieve these pledges, not just government actions. However, in order to accomplish anything, governments will need to make decisions on how to get them started on the path to reaching these goals, primarily via a combination of legislation power and policy changes. That’s where it all starts.
It takes time for robust legislation to be established. And because sustainability is broad and complex, and touches different organisations and institutions in different ways, legislators need to prioritise which part of sustainability – climate or other aspects – they should focus on first.
Many countries have started with the environment, specifically climate. But even then it was not realistic to start with all businesses and all sizes, as the EU taxonomy so aptly demonstrated when it launched in 2020. Despite its might, it could only start with defining two of the six objectives which relate to climate, focussing its attention on financial market participants and large companies (over 500 employees). This is due in part to the monumental task of defining what is included, but also due to the various political forces at play. Take nuclear power and fossil gas as good examples.
If we want to see quicker progress on these urgent issues, the private sector needs to act without waiting for legislation, and indeed it has. Some great examples include the UN Principles for Responsible Investment (PRI) to promote the incorporation of ESG factors into investment decision-making, which currently boasts over 7000 participating asset owners and asset managers in 135 countries. Another set of self-imposed principles was introduced by the UN Principles for Responsible Banking, which has so far been adopted by 270 banks and financial institutions.
There is also a flood of private sector activity that is too large to be counted, businesses committing to incorporate ESG into their decision-making process and seeking to promote it by using varying levers of influence that may be available to them as shareholders or counterparties in transactions.
As a result of this, significant activity has been taking place in the sustainability spheres, from publishing sustainability reports and creating sustainable financial products such as bonds and loans, to setting up dedicated ESG funds and ESG indices. In some cases, they are genuine attempts, and in others they may be riding the sustainability wave. Either way, it will be quite a few years before we reach a unified definition of what constitutes “green”, “sustainable”, if ever.
In the meantime, it does not mean that we should stop trying. Governments and regulators, and rightly so, are in the process of investigating how companies package and market investments, looking at disclosure lapses and more serious accusations of “greenwashing” or of overstating ESG capabilities as seen with the probes into DWS and Goldman Sachs.
The results of these actions and the public responses (positive or negative) are merely part of the learning process. Debate and dissent makes people focus and decide what makes sense and what doesn’t when it comes to sustainability, and will only strengthen what we already have in place.
Regulatory investigations will also shape the space, but more importantly they will send strong messages to the market that ESG needs to be taken seriously. Companies cannot simply ride the wave, as there will be serious consequences for that. And that has got to be good news.
About the Author
Luma Saqqaf is a sustainable finance practitioner working with companies and financial institutions on achieving their desired ESG goals. Her sustainable finance experience is built from three decades of leading the way in finance, Islamic finance, sustainability and entrepreneurship.
A former finance partner and global head of Islamic finance at the “magic circle” law firm Linklaters, Luma is also an investor and entrepreneur. She is founder and creative director for sustainable womenswear brand BYLUMA, an advisor and mentor to several social enterprises in MENA and also cofounder of Ajyal Group that invests in diverse sectors.
Her investing experience comes from a global perspective. She is a former advisory board member to VIP Fund – a US venture philanthropy fund investing (and developing) edtech, mediatech and fintech start-ups in MENA. She also founded JeeranSME, a non-profit network which provided business mentoring to startups and SME’s in Jordan and Palestine. She is currently working with several angel investment groups in Europe and the Middle East.
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