Does the “ESG” bracket cover the severity of the climate crisis or is it a box-ticking exercise?

ESG is the new buzzword of the banking/asset management space, going from a niche concern on the fringes of the investment world to becoming the major topic of discussion at events in both long-only and hedge fund sectors.

It remains a poorly defined and vague concept, with a variety of companies offering ESG services that encompass the enormity of the topics it covers.

Does the ESG mandate have the ability to help effect change in a world that is hurtling towards climate collapse or is it a bandaid for desperate times?

What is ESG?

ESG is Environmental, Social and Corporate governance, and is closely tied to the rise of SRI or socially responsible investing.

It covers three separate topics, namely environmental issues and climate change, social issues such as diversity in the workplace and care for animals and corporate governance.

The main driver for the focus on ESG has been that Millennials now constitute an increasingly dominant part of the investment landscape (the oldest Millennials are now almost 40 years old), while their younger cohort, Generation Z are beginning to enter the workforce.

A number of social changes have taken place in Western societies over the last twenty years, with racially diverse populations now the norm in Western European countries such as England, France, Spain, Germany, Sweden and Portugal, while the racial diversity of the USA has increased.

For example in the USA people of Hispanic/Latino heritage comprise almost 20% of the population.

As a result of the change in Western societies, there has been a greater push towards increasing the diversity of corporations and ensuring that at both board and employee level recognition is made of the gender and racial composition of those working for a company.

A second area covered by the ESG label is the environmental concerns. By comparison with issues around diversity in the workplace, which have relatively straight forward solutions and longer time frames under consideration, the environmental crisis is marked by a lack of time for meaningful action until catastrophe strikes.

The Intergovernmental Panel on Climate Change (IPCC) remarked in 2018 that there would be 12 years (we now have 11) to prevent an increase in the global average temperature to not exceeding 1.5 degrees celsius.

Once global temperatures increase beyond this point, threats to the global stability begin to accelerate to apocalyptic levels.

This year we saw the hottest June on record in Europe, with Germany seeing the hottest June for 140 years, and France recording its hottest days in recorded history, seeing temperatures of 46 degrees celsius in the south of France.

The problem with the climate crisis and the discussions relating to it are that the slower, more gradual conversations relating to it are inappropriate given the short timespan to save human civilisation and prevent a mass collapse.

A combination of climate change, overpopulation, water shortages and the destruction of habitats are pushing the earth towards an uncomfortable moment that may result in the loss of civilisation as we currently know it. A complete breakdown in global relations as people living in countries afflicted by heatwaves and flooding move en masse to cooler, safer regions.

There has never been a crisis like this in the short blip on the planet that human being have lived on and hence there is a dearth of meaningful philosophical responses to it.

Much of industrial capitalism of the last 150 years has been built on the presumption of unlimited growth. Indeed, modest reductions in the population of nations such as Japan and Italy are often described in foreboding terms, rather than as representing a lessening of pressure on the earth’s finite resources.

How can the asset management industry respond?

The first is by acknowledging the severity of the crisis and the limited time span for humanity to exist in its existing format.

Even well-educated people sympathetic to environmental concerns are often unaware of the level of the crisis, and the extent to which humanity has changed our planet and our ability to survive as a species on it in the longer format.

The second one is a revaluation of “ethical” or “green” investment parameters. Acknowledgement should be made at the decision making level that financial institutions should exist to help perpetuate the existence of the human race.

It can be difficult to discuss concepts relating to the climate crisis if it is not first acknowledged that humanity has a very limited timespan to survive in its current format.

The focus of conversations should therefore be akin to “how can we act in a way that helps perpetuate the survival of the human race”.

Another dimension is philosophical. Which is acknowledging the right of other species to exist on this planet, and that the destruction of countless habitats and species has been one of the worst crimes committed by human beings.

While ESG is a valuable concept, the danger is that the severity of the crisis can be downplayed in vague terminology and leave investors and the general public with the impression that the current impasse is being resolved.