ESG backlash is on the wrong side of history

Nigel Green

Nigel Green

This year has been branded the year of ESG backlash, as critics of environmental, social and governance investing within the advice industry become increasingly vocal in their approach.

The noise has grown even louder in recent weeks following regulators’ investigations into two large asset managers for their ESG criteria.

In June, BNY Mellon got fined $1.5mn (£1.2mn) for asserting that five funds run by subadviser Newton factored in ESG criteria when selecting all securities when they only did this for some stocks.

A few days later, Deutsche Bank and its fund arm DWS were raided by police in Germany following allegations that it had exaggerated the extent to which its funds integrated ESG values.

The ESG cynics within the advisory community claim that those who champion this kind of investing are simply grandstanding and virtue-signalling. 

Some also allege that this kind of investing undermines or compromises essential government policy and action in the areas that it purports to support and is therefore resolutely unhelpful.

Meanwhile, others say that the very premise is flawed because if ESG investments are financially sound, then fund managers focused on maximising client returns already take them into account, so what’s the point?

All these views might carry a very small grain of truth, but not enough to be substantially accurate.

There’s no getting around the fact that those companies that take their ESG obligations – and they are, in my mind, obligations – seriously are the ones that demonstrably outperform.

Indeed, Bank of America Merrill Lynch research reveals that 15 out of the 17 S&P 500 bankruptcies from 2005 to 2015 were organisations with poor environmental and social credentials five years prior to their filing for liquidations. 

Also, it shows that significant ESG-orientated controversies were accompanied by peak to trough market capitalisation losses of half a trillion dollars for large US firms between 2013 and 2019.

It’s clear that companies with strong ESG credentials compete better with their peers in terms of related technology, innovation and regulation. 

In addition, they are more successful at recruiting and retaining top talent.

While scrutiny must be welcomed and some criticism of poorly executed or inconsistent implementation is warranted, I would urge that those in our industry who are looking to weaponise or politicise ESG investing by branding it as ‘woke virtue-signalling’, among other things, are placing themselves and their companies on the wrong side of history. 

The so-called ESG backlash is misguided and shallow.

A more insightful, less divisive debate about the performance and value of this type of investment is merited.

Nigel Green is chief executive and founder of deVere Group