Over the last twenty years, the investment world has increasingly integrated social, environmental and governance factors into investment decisions that are therefore no longer based solely on financial elements. This so-called ESG financing is becoming more widespread and today accounts for a significant, even dominant, part of the demand from end investors. ESG issues are now central both because of our society’s need to evolve and because of their ubiquitous presence in corporate strategy.
Thus, non-financial criteria are present in the fundamental analysis of companies, but the rules of application of ESG must be adapted to avoid pitfalls. We mean, in particular, the antagonism between local ESG rules and global geopolitics. ESG has always moved within a framework that was considered stable, ie globalization. However, starting in 2018 and the beginning of the so-called trade war between China and the United States, we see that this structure can be questioned. The Ukrainian crisis is a new announcement of the sustainability of this economic and social development without borders.
Cruel dilemmas in the future in ESG
If the decades-long process of globalization gives way to the regionalization of the economy, can the ESG analysis network remain reliable and, above all, self-sufficient? For example, the decarbonisation of the European economy, which involves the cessation of coal-based electricity production, depends in part on Russian gas for the so-called transition period. If this supply is suspended, finding the best solution will be problematic, with the risk of having to temporarily restart the coal. Because the ultimate goal is not only success in the energy transition, but also the integration of the social consequences that this can lead to, hence the concept of a fair transition.
Green finances, which are in favor of excluding fossil fuels from the first euro, face a dilemma: how to invest in a coal-free energy transition? Is it “fair” to take the risk of punishing the European economy by preferring environmental and moral criteria over social ones? How to solve the problem of Europe’s external dependence on raw materials such as potassium, necessary for fertilizers and today almost exclusively imported from the Russia-Belarus-Ukraine zone? Should we ignore our warnings about managing companies operating in these regions?
Coordination of social impacts and environmental choices
It is hard to imagine that when almost all countries on the planet are moving towards increasing openness to the outside world, such dilemmas are likely to multiply, calling into question the idea of overly dogmatic ESG, as well as exclusion from portfolios. from the first euro turnover of companies engaged in armaments, mining or fossil fuels. Such unwavering exceptions could, on the contrary, weaken the European economy and ultimately nullify all efforts made in the field of ESG.
The solution is not a simple grid of criteria, but enlightened finance, ie pragmatic and cultivated holistic vision. We sincerely believe that the ESG’s view of finance creates value for companies and society at large, but additional finance needs to be seen more broadly than the immediate result, and in particular better integrated with the concept of improvement. The transition to low-carbon energy is important, but it will be long and expensive; Fossil fuels will remain indispensable for some time to come if we do not advocate a sudden downturn that could be a source of potentially significant social harm.
The need for educated finances
Therefore, support is needed. Admittedly, this course of action sometimes involves extremely unintuitive choices. For example, recognize that oil groups are also key players in transition, as they are sometimes the ones who invest the most and fastest in renewable energy. We may also have to recognize that arms investment in companies such as Thales or Airbus remains positive for containment and, therefore, peace, which the sector’s exclusion from the first euro, according to certain ESG principles, does not allow. Thus, the challenge for players in the world of stable finance is to know, in our opinion, not to punish “bad students” from the beginning, but to choose companies that can meet the challenges of tomorrow and support them in their transition. .. to maximize shareholder value creation as well as the environment, society and governance.