What do de-banking, ESG and ex-FSA head Howard Davies have in common?

In late July, Panacea Adviser updated its members on the ongoing scandal of the de-banking of those considered to be ‘not one of us’.

A lot has gone on since then. NatWest was engulfed in a full-blown media crisis after its chief executive, and that of Coutts, had to step down.

Shares plunged, amid calls for the whole board to go over the scandal, although it revealed a set of strong second-quarter results in July, which beat analysts’ expectations.

The only big name still standing was - and still is - NatWest Chairman Howard Davies who, when the debacle started to unravel, gave the classic football club chairman vote of confidence in support of Alison Rose. He is set to retire next year, according to the FT.

In concentrating so much on the ‘S’ and the ‘G’ side, it seems CD - that emphasis on the consumer - has been completely lost in the ether.

Davis will be remembered fondly by IFAs as the man who was at the now-defunct Financial Services Authority.

(Long-term readers of FTAdviser will remember the print title Financial Adviser caricaturing him as 'Howard the Duck' in its old 'Regulation Street' cartoons.)

In its short life, the FSA failed to rein in the banks and even encouraged the City to explode in the mid-2000s with a 'light touch' approach to regulation.

It did not notice that Northern Rock was built on such shaky foundations that it could easily run out of money and failed to prevent the takeover of ABN Amro by RBS just as the credit crunch was biting in late 2007.

At the time, MPs had accused the watchdog of being "asleep at the wheel" during the run-up to the financial crisis.

Critics questioned, at the time, whether Sir Howard was the right person to run RBS, now part of NatWest – which is still part owned by taxpayers. 

Jonathan Isaby, chief executive of the Taxpayers' Alliance, said at the time: "His record doesn't inspire tremendous confidence."

ESG scrutiny

Fast forward to the FSA successor, the FCA. It revealed plans in October 2022 to scrutinise companies use of terms like ‘ESG’, ‘green’ or ‘sustainable’ in a bid to prevent firms from misleading investors.

In January 2023, Harriett Baldwin, the chair of the influential Treasury committee, slammed the FCA over its planned ‘greenwashing’ rules, claiming the regulator landed on “suspiciously round numbers” to justify the plans and questioning the methodology it used to reach its conclusions.

Over the past week, as widely reported, several high-profile Conservatives and ex-finance industry leaders have written to the chancellor, expressing worries that the FCA may have unintentionally fostered the banking culture that led to Nigel Farage’s loss of his Coutts account.

They said: "The FCA has actively been pushing an approach that imposes a cultural shift and diversification of thought in banks and other financial firms”.

Those signatories also voiced their concerns about the FCA enforcing ESG changes, arguing that the interpretation of ‘environmental’, ‘social’ and ‘governance’ is debatable at best.

Where does 'governance' sit among all this?

My question is whether the drive toward ESG-type investing and the associated regulation is providing the fuel to a fad that will go away, or whether it is a sinister, Trojan horse-style activity undermining the system, hurting investors, companies, and the economy?

For example, the ESG craze and fear of regulations in recent years heralded the ensuing underinvestment in the oil and gas industry and may have shifted not only the oil price dynamics, but also that for all commodities.

Pushing corporations and fund managers toward ESG, ESG ratings and other criteria may erode shareholder value considering the upfront costs of many ESG strategies, such as reporting, legal, staff training and compliance costs.

Not to mention various new regulatory requirements that introduce additional costs to the ESG fund management process.

But what about the ‘S’ and the ‘G’ in all this de-banking mess? Where does 'governance' fit into that equation?

Do ESG based investments actually make money? How do ESG factors affect the investment process? And where does 'governance' sit among all this?

Answering these questions is not easy as the measurement of ESG ratings is very complex, and there is a lot of disagreement among ESG rating agencies about the proper way (if any) to measure ESG performance, as well as differences in ESG ratings provided by different ESG rating agencies.

Methodologies differ because there are different ways that ESG rating agencies choose and aggregate ESG attributes, and in measuring these attributes.

As a result, there appears to be a lot of noise in the relationship between ESG scores and stock returns.

I recall 2020 studies by Damodaran concluded that “a lot of money will have been spent, a lot of people (consultants, ESG experts and ESG measurers) will have benefited”.

So that is the ‘E’ bit out of the way. But what about the ‘S’ and the ‘G’ in all this de-banking mess? Where does 'governance' fit into that equation?

It seems to me that what is missing from all of this are the letters T, C and F (TCF) now known as something completely different from this week- consumer duty.

In concentrating so much on the ‘S’ and the ‘G’ side, it seems CD - that emphasis on the consumer - has been completely lost in the ether.

So many letters, and not much more.

What do you think?

Derek Bradley is founder of Panacea Adviser. A version of this first appeared in Panacea's daily briefing today (Wednesday August 2) 

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