ESG factors will not change the world

The best way to achieve real impact is to invest in real assets, not paper stocks.

For us, ESG is a matter of behavior, and the best managed companies in the world did not wait for the invention of the term to implement best practices. Back in 2004, the United Nations commissioned a report that called for “better consideration of environmental, social and corporate governance factors in investment decisions.”

Do not harm the environment, do not use child labor, pay decent wages, treat employees with respect and dignity, avoid discrimination. It’s all basic business common sense. This is not revolutionary, and well-run companies have always operated this way. There was a time when business school students could simply talk about “best practices.”

What has changed and is new is the need to document, demonstrate and quantify the extent to which these core principles are applied. We have moved from the recognition of best practices to a more codified, structured and formal set of goals, activities and objectives.

In some ways this is good – transparency is certainly better than any other alternative – but have we fallen into the trap of simply measuring what can be measured without setting a specific goal?

If my inbox is any indication of what’s happening right now, the financial world is likely to be taken over by ESG consultants, data analysts, and service providers—each with a new dashboard, toolkit, and reporting system. They all sense a market opportunity, especially as we all try to figure out what standards should be applied.

Have we reached peak ESG?

After more than three years of positive net flows for funds focused on ESG issues, the situation appears to be changing.

Of course, this could just be a reflection of investors limiting their losses. ESG funds tend to be overweight in the technology sector and have little or no exposure to oil and gas. This turned out to be the worst possible mix of equity portfolios in the first half of this year.

It’s no surprise that some ESG funds are now trying to justify higher exposure to the best sectors, even if the reasons for doing so seem tenuous.

The importance of focusing on results

But at the end of the day, it’s the results that matter – the extent to which companies have delivered goods and services that matter positively. This is what we define as impact and what we should ultimately be judged on.

The vast majority of people and companies in the investment industry invest in financial assets, be they stocks, bonds, credit products or derivatives.

Recently, attempts have been made to reclassify investment funds as green, sustainable, ESG or impact funds. But despite the best efforts of fund management marketing teams, the truth is that buying shares in the secondary market only changes the ownership of the share certificate. In terms of contributing to climate protection or social improvements, these investments are completely worthless.

We believe the best way to get real exposure is to invest in real assets, not paper stocks.

In this way, investors inject new money into the economy, create new jobs, develop new assets and make a positive impact on the people and communities in which their money is invested.

After spending more than 30 years on the trading floor of investment banks around the world, I was very humbled to visit a primary school that for the first time has sanitary facilities with running water, I met with businessmen and women, civil society leaders and local politicians who all testify to the impressive economic change as a result of job creation, directly or indirectly through investment in infrastructure and stable electricity supply.

Under the condition of stable electricity supply, businesses can prosper and develop. Taxes paid at the local level finance public works and improvements in sanitation, education and health care. Reducing dependence on fossil fuel imports can create a more sustainable economy and promote energy security. Created jobs bring security and stability to families.

Investing in paper assets is only associated with jobs on Wall Street and in the financial industry.

ESG matters because behavior matters. But results matter even more, and real impact can only come from investing in real assets.