The ESG movement, originally driven by good intentions, has been co-opted by lobbyists, special interest groups and various NGOs, and recent reviews have revealed its lackluster performance in creating meaningful environmental change and have highlighted chronic abuse of flawed methodologies.
This reality is painted by a report from Brown University which exposes how energy companies are pouring vast amounts of money and time into reputation-building “green” advertisem*nts, amounting to an eye-watering $3.6 billion as of the latest data. This is echoed by a study conducted by Harvard that reveals approximately 72% of social media posts made by oil and gas companies incorporate deceptive greenwashing tactics (a deceptive marketing tactic that seeks to construct an illusion of environmental consciousness). This greenwashing tsunami is designed to mislead consumers about the environmental implications of investing in oil and gas companies, still some of the biggest contributors of greenhouse gases and global warming.
Although many instances of the creative use of statistics or simple deception have been revealed, regulatory bodies lack the resources to act and tend to prioritize other more tangible problems. However, a case in 2021 involving Walmart and other companies highlights the incredible extent of greenwashing as they faced a combined fine of $5.5 million for mislabeling rayon as “sustainable” bamboo.
Has ESG gone too far – the “Kit Kat” Standard?
ESG investing strategies have traditionally focused on key issues such as sustainability, modern slavery, equality, executive pay, credible reporting and the environment. However, there is a growing movement within ESG activism to include “nutrition” as an important factor in guiding investment decisions.
A notable milestone in this campaign occurred when a group of institutional investors, managing approximately $3 trillion in assets, attended Nestle’s annual meeting. Nestle, a prominent player in the food industry with brands like Kit Kat, became the target of ESG activists’ demands to promote more nutritious products and reduce its portfolio of chocolates and sweets.
Nestle’s shareholder mutiny served as a catalyst for the company to develop and release a new set of ranking metrics that specifically measure the nutritional value of its food portfolio in comparison to other food companies. It’s well known that “ranking metrics” are used by the activist community to exert pressure on companies that fall behind in their preferred metrics. These metrics can be expanded once corporate compliance is achieved.
Not surprisingly, such examples of radical activism have raised concerns about the long-term appeal of ESG focused investments, with data showing a decline of approximately $163.2 billion in global assets under management by “ESG Friendly” funds during the first quarter of 2023 compared to the previous year.
Empirically, fund managers are now warning that whilst narrow-focused ESG funds can occasionally deliver successful outcomes, they often struggle in the long-term to outperform broader market indices. This challenge happens because these boutique funds supposedly avoid larger groups of “bad” companies, sectors, or industries in their investment strategies. It remains to be said that there are really no alternatives for a consistent return – funds have to prioritize bottom-line investing, economic fundamentals, diversified and risk-adjusted returns and only then critical ESG goals.
Greenwashing, Kit Kats, and moving goalposts.
In the world of greenwashing, a newer form of misinformation known as “Greensplaining” has emerged that specifically targets environmentally conscious investors. An example of this is the introduction of the “Xtrackers MSCI USA Climate Action Equity ETF” by DWS, Deutsche Bank’s asset management arm. This ETF was designed to offer exposure to companies actively engaged in climate transition. However, its strategy, which focuses solely on the top 50% of companies in MSCI’s global industry-classification sectors and evaluates performance against an MSCI-designed climate-action index, lacks consistent alignment with ESG goals.
MSCI develops its own customized ESG indices and analytics and then demonstrate to investors that they can outperform their own indexes. This creates a bias as MSCI designs the index, tracks its performance, and then determines whether the companies meet its own index criteria, all while presenting it as a responsible ESG initiative. To cover this obvious issue, MSCI explicitly states that it cannot guarantee that these ESG indices and analytics will outperform broader indices or lead to better global climate outcomes.
We should remember that ESG originated from a December 2004 report commissioned by the United Nations that aimed to create meaningful connections between financial and corporate activities with social policies, with an emphasis on fostering responsible practices rather than coercing corporations into compliance with an activist agenda. This original ESG concept is being compromised, and its agenda is being hijacked.
Cases like Nestle’s and MSCI serve as an example of the issues in the ESG movement, highlighting how it is veering off course. This diversion from the original agenda is further exacerbated by companies jumping on the sustainability bandwagon as a pure marketing tool, leading to the rampant spread of greenwashing.
It’s hard to predict the future of the ESG movement, but in the meantime, let’s enjoy our Kit Kats before they become extinct.
