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ESG is BS. We need Climate Impact

Duncan Grierson

12 November 2021 Climate ChangeSustainability

by Duncan Grierson, Founder & CEO of Clim8 Invest

ESG is a huge distraction in the fight against climate change. Investors need a new category that does what it says on the tin – Climate Impact.  

In the past few years, a tsunami of money, trillions of dollars have moved into so-called ESG investment funds. Yet despite supposedly screening for environmental, social and governance issues, it is shocking that the world’s 20 largest ESG funds hold on average 17 fossil fuel companies in each of their portfolios. And it’s not just fossil fuels – they also hold tobacco, weapons and alcohol1.

Many ESG funds also have Big Tech in their top five holdings. Investing into Facebook is not making any difference on climate change. Google’s parent company Alphabet is the most common stock in the top 20 ESG funds2. Although Google has made much effort to green the energy usage of its data centres, their core product is not making a positive impact on climate change.

It’s a depressing fact that ESG is used as a marketing trick to capture more investment dollars. Asset managers have taken advantage of the hazy, unregulated definition of ESG to facilitate greenwashing on an epic scale3. This has made the investment industry complicit in slowing down the systemic changes the world needs to reverse climate change. Although the ‘good’ companies within ESG funds are working to reduce their negative externalities, this is not enough if we want our children to have a truly sustainable planet to live on.

Regulators are beginning to wake up to ESG’s inherent problems. The UK’s Financial Conduct Authority warned fund managers earlier this year that their “poor quality” ESG fund applications may impact consumers and must improve4. The European Union is working on a taxonomy governing what can be marketed as ESG5 and the Securities and Exchange Commission in the USA has formed an ESG task force6.

These are all welcome developments. But even with better regulation, it’s unlikely that every ESG fund is going to switch its portfolio to truly impactful investing overnight. The reality is that ESG is a distraction from the investment needed to live sustainably on our planet. Creating the change we need means moving away from ESG and forming a new investment category – Climate Impact.

By stopping the greenwashing and investing only in companies that are leading the way in areas like clean energy, electric mobility and sustainable food, we can target our investments for the greatest possible good. Nothing less will do. De-carbonising our way of life, from the food we eat, to the clothes we wear, to how we get from A to B, will need investment of trillions of dollars across every sector. And the change needs to happen now.    

So let’s stop the pretence that ESG will make a difference with slightly greener funds and seize the moment to create something better. Climate change is a cancer that is attacking our world. ESG is a paracetamol that numbs and distracts us from solving the biggest problem the world has ever faced.

Let’s embrace a new category that climate-conscious investors can get behind: The time is now for Climate Impact.

Sources:

1. The Economist

2. MSCI

3. U.S. Securities and Exchange Commission

4. Financial Conduct Authority

5. European Commission

6. U.S. Securities and Exchange Commission

Image courtesy of Jean Beaufort “Forest Fire”, Public Domain Pictures

Views expressed in this article are those of the author and may be subject to change.

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