Climate change’s new victims

Forget for some time the Indian stance on the ongoing Russian-Ukraine war, which is still attracting zillions of bouquets and brickbats. Instead, focus on another equally interesting issue close to India: climate change and the relevant ESG drama unfolding globally.

A fortnight ago, a senior investment banker with the reputed HSBC got suspended for his punchy speech in Miami, the United States, on the unabated climate change topic. Stuart Kirk, HSBC Asset Management-Responsible Investing, told the audience that too much is made of climate change. Instead, he recommended the central bankers focus on growth and inflation — a topic that is keeping central bankers sleepless post-pandemic and the Russian-Ukraine warn since February.

US Treasury Secretary Janet Yellen recently admitted that she was wrong about inflation projection and goofed up to India’s Reserve Bank of India governor Shaktikanta Das, tweaking interest rates through a hurriedly arranged monetary policy committee meeting and advancing it by a month.

Kirk, former Financial Times editor-turned-investment banker, compared the climate crisis to Y2K challenge at the turn of the millennium. “There’s always some nut job telling me about the end of the world…. Amsterdam has been six meters under water for ages and that’s really a nice place. We will cope with it,” thus Kirk shared in a witty speech, unaware that these utterances would endanger his job.

Though the beaded and baldy Kirk got suspended pending an investigation by HSBC, the high priests at the Wall Street Journal cheered him saying, “he merely said what many in his industry believe but are too timid to say. Climate change poses a negligible risk to the global economy and bank balance sheets.”

Forget the central bankers. Climate change is being used as an investment strategy and marketed under the catchy ESG tag. Significantly, the same ESG has landed German asset chieftain Ashoka Wohrmann of DWS, owned by Deutsche Bank, in a soup. Over the past few days, the offices of DWS were raided on alleged charges of “greenwashing.”

What has greenwashing got to do with ESG? Plenty. Globally, the climate change debate generates a big buzz in the capital markets. ESG, as we know, stands for environmental, social, and governance. Corporates, without exception, have agreed to reduce carbon emissions by 2050. The tectonic shift from the internal combustion engine or ICE-driven automotives to electric cars is part of that save the planet initiative. Under pressure from private equity giants such as Black Rock and other investor activists, oil giants are gradually reducing their oil exploration investments and focusing on renewable energy routes.

There is a race among corporates to score highly on the ESG index. Unsurprisingly, the weightage for each element of ESG varies among a clutch of rating agencies. There is no standardization for a fair and impartial assessment. Taking advantage of this lacunae, the same company may be rated differently, and huge private equity firms tap such shoddy work to create ESG-focused funds, claiming these investments are “good and ethical” ones. Debatable.

This is where the term “greenwashing” creeps in. Greenwashing is a marketing technique aimed at creating an illusion of ecological responsibility. Green communication doesn’t always mean that the company is environmentally responsible, according to climate.sectra.com.

This is why NGOs frequently use the concept of greenwashing to denounce companies that claim environmental concerns while their activities and practices prove otherwise. The Exxon battle where activist investors, for example, have bulldozed their way into the board and ensuring the oil giant reduces its focus and investment in environment-unfriendly fossil fuel and instead diverts funds towards renewable energy.

Given the marketing gimmick surrounding ESG, companies allegedly fudge their “E” concerns. This is where DWS Wohrmann got into a quagmire. In his Annual Report for FY2021, Wohrmann posted 115billion Euro ESG assets against 459billion Euro towards ESG integrated assets for the previous year. Such a massive drop made the German security markets regulator BaFin suspicious leading to raids. Wohrmann has to step down. No option. Just not BaFin, even the Securities Exchange Commission of the United States is onto the fund managers of ESG branded products, citing a lack of transparency and vague interpretation.

Market analyst Tyler Durden does not mince words: “After years of being critical of “ESG” investing and appending the label to any company immediately caused a misallocation of capital in its direction, it looks like the buzzword investing scam is starting to unravel in real-time. (1)

First, the Securities and Exchange Commission said that it planned to crack down on misleading ESG claims. New rules “would specify disclosures to be made by investment funds when they mention terms like ‘ESG,’ ‘low-carbon,’ or ‘sustainable’ in their names,”

The buzz in the market is that when regulators have not defined what ESG labeling stands for, how can investment firms know what these letters stand for. In the absence of such a clear definition, these firms improvise with the net result, retail investors are taken for a ride.

The noose is tightening. The SEC of the US has set up a Climate and ESG Task Force in the Division of Enforcement. “Consistent with increasing investor focus and reliance on climate and ESG-related disclosure and investment, the Climate and ESG Task Fore will develop initiatives to proactively identify ESG-related misconduct. The task force will also coordinate the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations,” said SEC in its press release. (2)

The Task Force will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues and provide expertise and insight to teams working on ESG-related matters across the Division. While HSBC Kirk’s suspension came because his HSBC bosses felt such a public stance would impact the giant’s ESG-related and climate change-focused investment activities and clientele, Wohrmann was caught in the web of misreporting courtesy whistle blower Desiree Fixler.

Are most of the trillion-dollar “sustainable investments” bogus and unsustainable? The drama is unfolding. Many more heads are likely to roll in the days to come, and the fate of the ESG-related and climate change-focused funds will be interesting to watch.

Does it mean the end of the ESG era that excited the world? Not at all. With regulators stepping in to usher in order among the free-spirited capitalist world, the growth and pace of ESG and climate-related investment options may slacken, no doubt. With social media on the ascent, unlikely to be silenced despite all data privacy concerns and government moves to tighten the lid on the BigTech, occupants of corner offices and chief sustainability officers will be under the lens seamlessly. Nowhere to hide if caught. Present-day investors are eagle-eyed, and any lapse on the part of business enterprises will lead to reputational damage, which no CEO would wish. (3) Out of the current chaotic scene, better corporate governance will emerge to create a truly sustainable planet.

“Many bosses enjoy boasting,” opines John Gapper of Financial Times while on ESG and concludes that “Making the world better is admirable, but fibing about it is odious. Many CEOs have adopted St. Augustine’s approach to chastity in relation to social responsibility: praying to be virtuous, but not yet.” (4)

Tom Braithwaite aptly sums up the drama unfolding: “The jig is up for ESG. Regulators are swarming. Investors enthusiasm is waning. Executives are revolting.For the armies of asset managers, data provides, consultants and advisers that have sprung up in the past 10 years this is an existential threat.” Well said. (5)

However, one big lesson to remember: don’t fall for marketing hype. Do your due diligence.

Ref:
(1) https://www.zerohedge.com/markets/esg-funds-post-largest-monthly-outflow-record-greenwashing-racket-starts-unravel
(2) https://www.sec.gov/news/press-release/2021-42
(3) ESG exposed as the world is forced to switch priorities, Gillian Tett, FT Money, 4 June 2022
(4) Greenwashing is tempting for CEOs who tell stories, the Financial Times, 4 June 2022
(5) Move over ESG, the time is right for a BS Index, Tom Braithwaite, the Financial Times, 28 May 2022

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