Those signatories also voiced their concerns about the FCA enforcing ESG changes, arguing that the interpretation of ‘environmental’, ‘social’ and ‘governance’ is debatable at best.
My question is whether the drive toward ESG-type investing and the associated regulation is providing the fuel to a fad that will go away, or whether it is a sinister, Trojan horse-style activity undermining the system, hurting investors, companies, and the economy?
For example, the ESG craze and fear of regulations in recent years heralded the ensuing underinvestment in the oil and gas industry and may have shifted not only the oil price dynamics, but also that for all commodities.
Pushing corporations and fund managers toward ESG, ESG ratings and other criteria may erode shareholder value considering the upfront costs of many ESG strategies, such as reporting, legal, staff training and compliance costs.
Not to mention various new regulatory requirements that introduce additional costs to the ESG fund management process.
Do ESG based investments actually make money? How do ESG factors affect the investment process? And where does 'governance' sit among all this?
Answering these questions is not easy as the measurement of ESG ratings is very complex, and there is a lot of disagreement among ESG rating agencies about the proper way (if any) to measure ESG performance, as well as differences in ESG ratings provided by different ESG rating agencies.
Methodologies differ because there are different ways that ESG rating agencies choose and aggregate ESG attributes, and in measuring these attributes.
As a result, there appears to be a lot of noise in the relationship between ESG scores and stock returns.
I recall 2020 studies by Damodaran concluded that “a lot of money will have been spent, a lot of people (consultants, ESG experts and ESG measurers) will have benefited”.
So that is the ‘E’ bit out of the way. But what about the ‘S’ and the ‘G’ in all this de-banking mess? Where does 'governance' fit into that equation?
It seems to me that what is missing from all of this are the letters T, C and F (TCF) now known as something completely different from this week- consumer duty.
In concentrating so much on the ‘S’ and the ‘G’ side, it seems CD - that emphasis on the consumer - has been completely lost in the ether.
So many letters, and not much more.
What do you think?
Derek Bradley is founder of Panacea Adviser. A version of this first appeared in Panacea's daily briefing today (Wednesday August 2)
