As with all buzzwords, its rate of usage is inversely proportional to its ability to mean anything specific. Perhaps when first coined, in a 2005 study entitled “Who Cares Wins”, ESG did stand for something – a broadbrush theory that companies that are concerned about the “sustainability” of their business environment tend to be more profitable in the long term.

At the extremes, there are clear examples. The long-run profitability of cigarette manufacturers was always questionable when it became clear that they were in no indirect way killing off their clients.

Amazonian forests’ worth of research have been done on the relationship between a company’s ability to grow its earnings and its ESG metrics, in an attempt to prove this connection between profitability and sustainability. The fact that the linkage has remained elusive has not stopped the financial services industry from creating a universe of investment products denoted as ESG, for which clients are charged accordingly.

This is not, in essence, a bad thing. In this age of passive investing, where investors have become all too happy to just “buy the index” as opposed to paying attention to what is happening in underlying companies, it should be positive that more attention is being paid to the activities of voracious capitalist organisations.

But not all shareholders have the time or the energy to be fully engaged stock selectors; a heuristic device is required. Asset managers have therefore created a number of active funds, exchange traded funds, and platforms tagged with ESG which profess to prioritise investments in companies that have high environmental, social and corporate governance standards.

But what investors may be imagining with these products – that their funds are being channelled into companies that manufacture wind turbines, for example – is usually completely divorced from reality. Reading through the main holdings of such funds, one is usually confronted with a number of companies, often food manufacturers and bank stocks, which are often publicly held to be acting in blatant disregard for the wellbeing of the environment at the behest of growth and margins.

A series of high-profile scandals, most recently at the German asset manager DWS, has shown that often the line between investing along obscure ESG metrics and more specific examples of active mis-selling has been crossed. Clients are promised that something is ESG compliant, they pay accordingly, and yet the fund turns out to be no different from the standard product.

Under pressure from passive trackers, ESG funds have been a key source of fee revenue growth for asset managers in recent years. Branding funds as green or ethical enables firms to tap into a vast wave of interest in sustainability, as well as providing an additional reason for charging management fees. According to financial services data provider Morningstar, investors poured $145-billion into sustainable funds in the last quarter of 2021 alone, 12% more than the previous quarter. In total, assets worth $2.7-trillion are in sustainable products, across more than 5,900 asset management firms. Clearly, to paraphrase Gordon Gekko in Wall Street: along with greed, green is good for business.

Following these scandals, clearly there needs to be some clarification as to what exactly these extremely vague terms actually mean. Tariq Fancy, former global chief investment officer for sustainable investing at the world’s largest asset manager BlackRock, famously stated last year that ESG investing largely consists of “marketing hype” and “disingenuous promises.” Allegations of “greenwashing” are rife.

To avoid this greeny-grey area, there is now a growing trend for asset managers to brand investments as sustainable only when they invest in those companies which are adhering to hitting the Paris targets of climate change, and minimising global warming to below 2°C, or preferably 1.5°C. But even this is difficult; energy companies such as Shell have stated their desire to attain these targets and reach net neutrality by 2050, but one would be hard pressed to describe Big Oil as a “green” investment.

There are signs that the regulators are waking up. The European Union, where more than three-quarters of ESG funds are based, has recently unveiled the Sustainable Finance Disclosure Regulation, which is based on the Paris accords and introduces new transparency requirements. Funds are then placed into different categories of sustainability and investors can choose between them.

The questions, however, of what the companies themselves say they are doing to preserve the environment and what they are actually doing remain unresolved. Locally, Nedbank has been at the forefront of ESG investing and green bonds, yet has been implicated by the Zondo Commission in contracts with Gupta-linked Regiments Capital for gross governance failures.

This is clearly very complex and difficult terrain. Companies want to maximise profitability and asset managers want to grow fees; these objectives are sometimes, but rarely, aligned with being environmentally and socially conscientious.

Somewhere between the completely uninterested bystander and the stock activist wonk who attends every AGM is a shareholder who adds value to society. One who uses the power of the capital they possess to make informed decisions about the kind of businesses they want to have cheaper access to equity and therefore become more profitable.

Rather than outsource to third parties to make decisions for them, investors’ interests are perhaps best served if they pay attention to what is happening in companies themselves, and allocate their capital accordingly.

Companies want to maximise profitability and asset managers want to grow fees; these objectives are sometimes, but rarely, aligned with being environmentally and socially conscientious. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.