Are UK Investors Being Duped Into False ESG Projects?

Although not a new term, ESG (Environmental, Social and Governance) investment has very much come to the fore post-pandemic, with ESG criteria becoming an increasingly popular way for investors to evaluate companies in which they might want to invest.

Put simply, ESG criteria are a set of standards for a company’s operations that socially and environmentally conscious investors use to screen potential investments.

And while the principles behind this notion, which first appeared in a 2004 United Nations report, are sound, there is growing evidence that funds and large companies are duping investors by merely boasting about their green credentials, rather than actually operating under ESG values.

So we need to ask ourselves, are we actually investing into true ESG projects or are we being conned? And how can we make sure that we are truly investing into a company that espouses ESG values?

ESG criteria are fairly self-explanatory. Environmental refers to how a company performs in terms of its “green” commitments. Social criteria cover how a company might manage its relationships with employees, suppliers, customers, and local communities, while governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Drilling down, environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, treatment of animals, management of toxic emissions, or its compliance with environmental regulations.

Social criteria might refer to a company ensuring that it works with stakeholders that share similar values; donating a percentage of its profits or resources to charity; or adherence to high levels of health, safety and well-being for employees.

With regard to governance, does the company use accurate and transparent accounting methods; are shareholders given an opportunity to vote on important issues; are there assurances around potential conflicts of interest; and is the company audited?

With our collective social and environmental conscience being prodded even harder this past 12-18 months, the ESG tag is working for many companies and indeed many funds and brokerage firms that are now offering products that employ ESG criteria – or so they say!

While it seems fairly straightforward to assess an individual company’s ESG credentials, it’s proving a more difficult task to judge the bona fides of ESG funds, as highlighted by The Economist this week, which looked at the world’s 20 largest ESG funds – the findings were confronting to any socially, or environmentally-conscious investor.

The Economist found that each of the top 20 global ESG funds on average holds investments in 17 fossil-fuel producers.

One of these funds holds a Chinese coal-mining company, two have interests in the world’s largest oil producer, and six were invested in ExxonMobil – the same company responsible for a $3.8Bn environmental disaster in Prince William Sound in 1989.

Just to cap things off, some of the funds were also found to invest into gambling, alcohol and tobacco… hardly the virtues of an ESG champion!

The underlying problem is what is being referred to as “greenwashing”, where ESG buzzwords abound in marketing materials and corporate disclosure is tainted, resulting in ESG investors being misled.

Governments are trying to improve things in this area, to ensure the many good ESG companies are duly acknowledged and recognised. Until they do however, perhaps investors are better off doing their own research on individual companies, rather than believing the hype and marketing of some of the so-called ESG funds.

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