ESG = Especially Savvy Greenwashing

Let’s call ESG investing what it is: ‘Especially Savvy Greenwashing’.

ESG funds (‘Environment, Social and Governance’) are one of the biggest trends in the investing world. Almost a trillion dollars flowed into ESG bonds, ETFs and related funds worldwide last year, according to Bloomberg, and the torrent shows no signs of abating as investors try to do the right thing (and make money) in the face of increasing climate threats and social upheaval.

ESG ‘products’ are supposed to give investors a simple, shorthand way to make investments they can feel good about, that are part of the solution rather than part of the problem.

Instead, ESG has been co-opted into meaninglessness, and every bad actor on the planet seems to be getting a piece of this massive pie. ESG money goes to oil and gas companies, fossil-fueled utility companies, and big banks that finance fossil fuel projects, not to mention mining, tobacco, and agribusiness companies.

Here’s how fossil fuel’s biggest players capture ESG investment dollars:

Gaming the points system. ESG is basically a points system, administered by for-profit companies like Morningstar (‘Sustainalytics‘) and MSCI, where if companies rank high enough, they can get ESG approved. So if you’re an oil company with tons of new methane-spewing fracking projects, but you’ve recently made your board of directors more diverse, stopped treating your workers as badly and upped your charitable contributions… you’re in!

Promising to do better… in the future. Companies can get ESG ratings and increase their ability to sell ESG bonds or equity is by making commitments to be carbon neutral or ‘net zero’ at some future date. Some (like Exxon-Mobil) can even get credit just for disclosing how badly they’re doing right now, after decades of withholding this data. Getting money now for promising to clean up your act decades from now is a pretty good deal!

Financial engineering nobody can figure out. The first wave of ESG bonds required companies to spend the proceeds on specific sustainability projects. But Wall Street quickly came up with a watered down variant, the ‘sustainability-linked bond.’ SLBs allow firms to raise ESG money for general corporate purposes by promising that if they don’t meet certain targets – like cutting emissions – they’ll pay extra interest. But that extra amount can be tiny, making the bond really no different than any other. Lenders love SLBs, because in the words of Bloomberg’s Matt Levine: “they can put in their annual reports and other public-relations materials that they’ve committed X billion dollars to [ESG], all by making a loan they were going to make anyway.”

Can ESG be greenwash-proofed?

To be sure, some ESG investors are trying to design funds backed by better data that can’t easily be gamed or manipulated for greenwashing purposes.

And in Europe, where the bulk of global ESG money has been raised, the EU is trying to force investment funds to get more specific about their ESG claims and back them up with data, through a new regulation called SFDR. But fund managers are pushing back, claiming it’s not always possible to produce this data and that it’s more practical to instead rate companies on their intent, and improvement processes they have underway.

One piece of data critical to debunking greenwashing claims is ‘Scope 3 Carbon emissions,’ or how much emissions a company’s products are responsible for beyond its own emissions to produce those products. Here’s a researcher at MSCI, a company that develops ESG rankings, explaining how hard that data is to generate.

If government-mandated climate reporting ever improves, ESG funds’ impact could become more than wishful thinking, for those who care about saving the planet.

But until that happens, the letters ESG should be seen for what they are – pure marketing.

This IPAA graphic (Independent Petroleum Association of America – see PDF) shows how oil companies can dress up their image to secure ESG funding, without exiting the fossil fuel business.
For more information:

Funds Europe, April 2021, “ESG: Green, Greener, Greenest…
Reuters, March 2021: “Sustainability-linked bond market to swell up to $150 billion.”
MarketWatch, March 2021: “Buyer Beware: What’s Really In Your Earth Friendly ESG Fund.”
Harvard Business School, February 2021: “To Fight Climate Change, Should Green Investors Reconsider Big Oil?”
Financial Times, December 2020: “Third of low-carbon funds invest in oil and gas stocks.”
Financial Times, October 2020: “Oil and gas lobby moves to embrace green investors.”