Some say ESG is in need of a rethink. There are others who have outrightly called it a ‘scam’. In 2022, ESG investing made the headlines for all the wrong reasons. But might there still be value in defending the concept?
By Samantha Ho, from Eco-Business.
Environmental, social and governance (ESG) issues frequently made the headlines this year, but not always for positive reasons. Greenwashing scandals, the denial of climate risk by corporate leaders and blatant lobbying by fossil fuel producers casted a shadow over the concept, once touted as an effective tool to push for more corporate action on the sustainability front.
It did not help that one of the world’s richest men dragged ESG through the mud. Politicians in the United States seem to be on a crusade for pension funds to break with ESG. Fewer companies were willing to go public with their climate-related targets over fears of being called out. International news weekly The Economist declared that “ESG” amounts to “three letters that won’t save the planet.
At the same time, the debates surrounding ESG are becoming more nuanced. An increasing number of companies and leaders are being held accountable for their statements about climate action and their commitments to improving ESG standards. There are stronger calls to standardise the ESG rating process. More questions are being asked – and for good reason.
Here are eight big punches ESG took this year:
1. Elon Musk: “ESG is a scam”
When global stock market index provider S&P kicked Tesla off of its ESG index in May 2022, the latter’s chief executive officer on Musk kicked up a fuss about it on Twitter.
“[Oil and gas giant] Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list!” he tweeted, adding, “ESG is a scam. It has been weaponised by phony social justice warriors.”
The tweet received almost 300,000 likes and more than 41,000 retweets. According to Google, interest in the term “ESG” peaked on the search index during this week.
S&P explained that Tesla’s removal was due to the company’s lack of a low-carbon strategy and codes of business conduct, as well as reports of racism and poor working conditions at its factories. In fact, Tesla scored among the bottom 25 per cent of its global industry peers, S&P said.
2. Funds lose faith in ESG investments
The world’s largest asset manager BlackRock has been attacked for its focus on ESG by both detractors of sustainable investing and those who say that the firm is not going far enough to divest from fossil fuels.
BlackRock’s focus on ESG “is not a focus on returns” and has violated the firm’s fiduciary duty, said North Carolina Treasurer Dale Folwell, one of many US state pension funds calling for CEO Larry Fink’s resignation.
Activist investor Bluebell Capital Partners also demanded that the firm, which manages some US$8 trillion in assets, replace Fink, but said it was because the firm has been inconsistent in its ESG efforts by failing to distance itself from coal.
Meanwhile, BlackRock’s close competitor Vanguard has pulled out from the Net Zero Asset Managers Alliance, an industry initiative which encourages fund management firms to reach net zero emission targets by 2050. Vanguard said that it preferred to speak independently on climate-related risks.
3. Fearful companies choose ‘green hush’
Increasing revelations of greenwashing by companies have led to many choosing to stay silent instead. This has led to the rise of a phenomenon known as ‘green hush’, where instead of putting out their stance and risking being called out for making exaggerated or inaccurate claims about their climate action, companies are avoiding the topic altogether.
The global JPMorgan Chase & Co analyst Jean-Xavier Hecker said in early December that regulators are expected to crack down hardest on firms that make misleading statements about their climate-related strategies and actions.
A report by climate project developer South Pole found that one in four businesses to not plan to talk about their science-aligned climate targets. “Not publicising progress makes corporate climate targets harder to scrutinise and limits knowledge-sharing on decarbonisation, potentially leading to less ambitious targets being set, and missed opportunities for industries to collaborate,” it said.
4. HSBC executive: “Investors need not worry about climate risk”
In July, a top executive at banking group HSBC said that climate concerns were being overblown by financial institutions and officials in a presentation titled “Why investors need not worry about climate risk”. The bank’s global head of responsible investing Stuart Kirk said at a conference that climate change was not a financial risk that investors and financiers needed to worry about.
HSBC suspended Kirk, with CEO Noel Quinn saying that the remarks were “inconsistent with HSBC’s strategy and do not reflect the views of the senior leadership” of the bank.
5. Fossil fuels make friends with COP27
Fossil fuel lobbyists came out in full force at the United Nations’ COP27 in Egypt this year, resulting in the final agreement dropping goals to phase out fossil fuels, which had been reached just one year ago.
Oil-rich United Arab Emirates (UAE) registered the largest delegation, bringing more than 1,000 delegates and the total number of oil and gas representatives present from 29 different countries were larger than the second largest delegation by country, Brazil, according to non-government organisation Kick Big Polluters Out.
“Despite the promise that COP27 would foreground African interests, the fossil lobby outnumbers any delegation from Africa. These numbers give a sense of who has power and say at these negotiations, and who does not,” said Alix Dietzel, senior lecturer in climate justice at the University of Bristol.
6. Backlash against Coca-Cola’s COP27 sponsorship
Unsurprisingly, COP27’s headline sponsor Coca-Cola came under fire for alleged greenwashing, as the drinks maker is among the largest buyers of petrochemicals needed to produce plastic packaging for its drinks. Coca-Cola has also routinely topped the list of the world’s biggest plastics polluters.
In response, Coca-Cola said that while the company recognises it has more work to do, “we believe that effective climate solutions will require all of society to be involved including governments, civil society, and the private sector.”
7. Human rights and labour issues plague FIFA World Cup
The beautiful game turned ugly over this year’s FIFA World Cup, which was marred by human and labour rights abuses by host country Qatar.
International football association FIFA cracked down on protests by players against Qatar’s criminalisation of homosexuality, with FIFA warning players that making political statements is prohibited. Homosexuality is a crime in host country Qatar, which told international fans that they cannot wear symbols of queer rights, such as rainbow-coloured shirts.
The deaths of migrant workers and forced labour found among many others who built World Cup infrastructure has also weighed on the tournament, with rights groups calling for FIFA to take action. Amnesty International found that workers who helped build World Cup infrastructure in host nation Qatar were threatened, had their pay withheld and required to pay recruitment fees, which contravenes the International Labour Organisation’s principles against forced labour.
8. Energy crisis leads Europe back to fossil fuels
Europe’s energy costs skyrocketed this year on the back of an energy crisis that was due partly to Russia’s invasion of Ukraine, which disrupted by the crucial export of Russian coal, oil and gas to the rest of the continent.
Earlier this month, JPMorgan chief Jamie Dimon said that the crisis proved that the world needs “cheap, reliable, safe, secure energy, of which 80 per cent comes from oil and gas”.
Investors in Europe and the US have largely matched these sentiments since the outbreak of the Russian-Ukraine war, leading to a surge in stock prices of oil and gas companies as well as declining interest in ESG investing, according to a HSBC report published in July.
However, several leaders including the European Commission said the current energy crisis would accelerate the transition towards renewable energy. In Asia, the higher price of fossil fuels could potentially turn emerging markets towards renewables at a quicker pace, said experts.