March 6, 2023

Monday Morning Memo: Do We Need to Rethink ESG Investing?

by Detlef Glow.

Yes! From my point of view, investors need to rethink how they approach ESG investing and which strategies they will implement, especially when we are thinking about the “E.”

Under the current framework, investors favor companies which have well documented ESG strategies and are well underway to achieving their targets year after year. With the increasing knowledge about ESG investing and the permanently growing amount of data available on the different ESG measures, investors are somewhat convinced that they are doing the right thing, or at least fulfilling what regulators demand of them.

But does this really help to achieve the sustainable development goals, especially when it comes to climate change?

From my point of view, it does move the needle in the right direction, but that might not be enough to foster the change needed.

In more detail, investors who follow a sustainable investment approach prefer to invest in companies with a strong ESG agenda. This may let the share prices of these companies go up and might bring the cost of capital down, as the respective companies may need to pay lower interest rates than their non-ESG aligned peers.

But what does this mean in the real world? If an investor want to sell a stock of a “brown” company, there needs to be a buyer on the other side. This means the stock will not disappear. What if the new owner has no sustainable agenda and wants the respective company to maintain and extend its current business without thinking about the outcome for the environment or any other ESG-related issue? Wouldn’t it be better if an investor with a sustainable agenda would maintain or even increase the ownership in the company and influence the board during shareholder meetings and other active ownership initiatives (engagement) to change the business behavior and to implement a sustainable agenda?

The same is true when it comes to bonds—every company can issue so-called green bonds. This means that even a “brown” company can participate from the lower costs of capital for “green” projects, which in turn frees up internal sources to finance their “brown” projects. We have also seen that some projects financed with green bonds weren’t green at the end.

With all that in mind, I think that we need to rethink ESG investing. There needs to be more room for activist investors who are willing to drive the change toward a sustainable business agenda in companies which are not considered as sustainability achievers or “green” by the current standards. Such an approach would move the needle much further since more companies would be urged by their owners to implement measurable sustainable goals.

Don’t get me wrong, I don’t want to give asset managers a “carte blanche” to proceed like they did in the past. This means, from my point of view, that asset managers who want to follow this route would need to report all of their engagement activities and the respective outcomes. This would ensure that their investors can evaluate if they are doing the right things and, therefore, are enabled to react respectively if the asset manager does not meet their targets.


This article is for information purposes only and does not constitute any investment advice.

The views expressed are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.

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