Rubber, Meet Road

Positive Mavericks, Institutions, Climate disruption

Face it: responsible investment is about political choices. Short of this reckoning, the fate of ESG might be the least of our concerns.

What is ESG? It depends on who you ask. But we offer a point of view: that it is shorthand for investor responsibility. That this responsibility is dual, one to protect and grow assets, traditional fiduciary obligation), another to manage and mitigate systemic risks, which no global diversified portfolio is ever immune to.

If we are honest – which we like to be – we have been a little surprised by the chorus of voices announcing the demise of ESG after investors failed to anticipate the invasion of Ukraine.

Not because there was no invasion, nor because ESG isn’t at risk of demise. Rather, the timing seemed odd. One wonders: what new information about portfolio construction or deep conflicts of interests of our global economic organization did the invasion unearth that was not available before?

The thing is that the demise of ESG has been announced many times before. If you were around during the Great Financial Crisis, then you might have been among those fearing that investors would suddenly have to focus on “bigger issues” to the detriment of their new pet side project. It did not work out that way.

If you were around at the start of the pandemic, you might, like we did, say that ESG was facing a real world test, which could lead to its demise. It did not work out that way either.

Cue the invasion of Ukraine. And what’s next? Climate breakdown? A collapse of natural systems? With each new crisis, finance has bigger fish to fry. But does it?

Of course, the truth is more complicated. The growth of ESG manifests itself in assets under management, in media coverage, in the public consciousness. Its impact remains at best, a work in progress, and a growing chorus consider it a distraction from real action.

But what each crisis reminds us of, is that this responsibility is eminently political. Finance, by choice or by accident, sanctions societal transformations, whether they are about the environment, society, territorial rule, and even technology. And there is no need to wait for crises to see this at play.

Twitter’s buyout by Elon Musk is an interesting example. Few people are going out commenting on the deal itself – it seems strong enough for a company who has long demonstrated its inability to do business. But most commentators share their views on whether it is good for society or not, on both sides of the spectrum. Even Elon Musk has a point of view. Why? Because Twitter is systemically important in shaping political spaces, whether we like it (e.g., the platform) or not.

In Washington DC, the US Congress recently torpedoed competent political appointments, like Sarah Bloom Raskin at the SEC or David Weil at the Labor Department.

Sarah Bloom Raskin is a former Deputy Secretary of the Treasury, whose original sin seems to have been to have offended important people by saying that investors should pay more attention to the financial risks posed by climate change. Hardly radical stuff, given it is a Larry Fink mantra.

David Weil was a candidate for a Labor Department job – administrator of the Wage and Hour Division – a role he held under the Obama Administration. His original sin seems to have been that he offended important people by saying that business models can amplify inequalities, and that investors were in large part responsible because of their desire to push shareholder primacy to the point where workers’ rights, including to freedom of association and collective bargaining, one of their primary powers, were disappearing. But investors were silent. As the classic French playwright Moliere wrote in his play about hypocrisy, “hide this bosom which I cannot endure to look on.”
Climate change and inequalities. These are ESG issues. Yet investors treat their political manifestations – including tax policies – as if they took place in a parallel universe. Policy? Finance? To say that the two are unrelated feels disingenuous. To assume that finance can on its own be a plaster for political failure is a capitulation.

We are Preventable Surprises because we believe that some surprises can be prevented, with a little foresight and a lot of determination.

It is time to do just that. It is too soon to call the demise of ESG. It might just do so by itself, collapsing at the foot of conflicting business and ethical demands. But so long as there are investments, we will need to give thought to responsibility, from investors, the companies they invest in, and the regulatory model that sets the rule for how markets work. And yes, it is time for investors to recognize that these are not separate fronts, and activate both: push for stronger corporate governance, and support the societal and political transformations that underpin ESG challenges like climate change and income inequalities.

They should proceed with care and, at the very least, they should get out of the way and make space for other voices. The risk of calling for such investor action is that it could reinforce markets’ stranglehold on fundamental, civilization shaping, policy decisions. The risk of inaction is to maintain a status quo whereby markets maintain a stranglehold on fundamental, civilization shaping, policy decisions. Nothing points to this being a desirable state of affairs.

We can wait for crises to happen to question our systems, cultures, and our best intentions, and act coily and reactively. Or we take a proactive stance and recognize that our financial system, from the way we save for retirement, to fiscal incentives, to corporate governance, is a political system, with global ramifications.

Pick one.

Michael Musuraca, Chair, Preventable Surprises

Jerome Tagger, CEO, Preventable Surprises

Back to all

Read next post

Migration is a climate issue is an ESG issue

1 March 2022