One of our pet peeves is when someone states a derogatory opinion dressed up as a fact, and in doing so misleads others who are then likely to repeat the criticism to colleagues and friends, and then it snowballs. People who know the actual facts may try to dispute the opinion-stated-as-fact, but if the criticism is stated authoritatively, by what seems to be a respectable source, it can do considerable damage.
We came across a prime example of this recently in an Opinion piece with the words “ESG Threat” in the title, published in the Wall Street Journal (note: paywall). The author of the piece certainly sounds authoritative; he is an adjunct professor of finance, which means he teaches in a college or university but is not a full-time researcher whose work is subject to peer review. Also noteworthy: he will be publishing a book on ESG and sustainable investing in 2023. That raised our eyebrows, as being combative and controversial can be good for book sales.
The author takes aim at the U.N.’s Principles for Responsible Investment (PRI) and investment managers who are signatories to that set of principles, using BlackRock as a prime example and key influencer. It would be one thing if he had said he doesn’t like the PRI and thinks asset owners and asset managers should decline to be signatories to it. But that’s not what he said.
Instead, his article is full of statements such as, “[the PRI] would like nothing better than for BlackRock to issue a company press release forswearing oil and gas companies in all the funds it manages.” First we note that he is not an insider at the PRI and is not privy to what the PRI would like to see. More importantly, as we show below, nothing in the six Principles that signatories commit to following says anything about divesting from oil and gas, or any other sector.
Here is the Signatories’ commitment, straight from the PRI’s website:
As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognize that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
- Principle 6: We will each report on our activities and progress towards implementing the Principles.
The author of the opinion piece goes on to say that PRI membership imposes a prescribed system of ESG conformity predicated on pressure and surveillance. This gives the impression that PRI has an ESG police force that goes around to asset management firms to make sure they are toeing the line (whatever line that is).
The reality, distinct from the authoritatively presented opinion, is that PRI signatories are required to publish a report every year that shows how they incorporate ESG into their investment analyses and decision-making processes. Apparently, this is what the author of the opinion piece means by “imposing a prescribed system of ESG conformity predicated on pressure and surveillance.” The 20+ page form asks about things such as the following. Judge for yourself:
|SG 06.1||Indicate whether you provide training/educational services on ESG/RI. Tick all that apply.|
|❑ Board/trustee training❑ Investment manager training❑ Regulatory bodies/authorities or public policy makers❑ Corporate executive training❑ ESG analyst training❑ Other, specify (1)____❑ Other, specify (2)____❑ Other, specify (3)____❑ Other, specify (4)____🔾 None of the above|
|SG 06.2||Describe the main components of your training/educational services on ESG/RI and any variations depending on the group you provide training/education to.|
|SG 06.3||Describe whether these training/educational services include any commercial elements.|
|SG 06.4||Additional information[OPTIONAL]|
Later on in the form, asset managers have an opportunity to respond to this prompt:
|SG 11||EXPLANATORY NOTES|
|SG 11||This indicator allows you to elaborate on how your organisation adapts its approach and execution of ESG services according to the investment goals or other needs of investor clients. Investor goals may be general such as generating superior, risk-adjusted returns or being an active owner, channelling capital towards positive impact investment opportunities and/or contributing to the sustainability of the financial markets. Actions to align your organisation’s philosophy on and approach to ESG with investor goals may include, but are not limited to: compiling an RI/ESG value or belief statement, setting RI outcomes to be achieved over time, setting timelines for RI outcomes, documenting RI outcomes, timelines and guidelines, and RI/ESG training when beliefs and outcomes diverge. If this indicator is not applicable to your organisation, please explain why not by using the ‘Additional information’ box.|
We could go on, but for many people reading this questionnaire is about as interesting as watching paint dry. The point is that the PRI reporting requirement is not “prescriptive,” as the author of the opinion piece claims.
We believe the PRI report serves a clear purpose (note that we indicated this is an opinion by using the phrase, “we believe”…). If an asset manager chooses “None of the Above” or “This is not relevant for my organization” for most or all of the questions it would send a message that the firm is technically a signatory to the PRI but does nothing to uphold the Principles. That is something that asset owners and consultants who help them to select their outside managers would want to know, if the PRI is important to them.
The opinion piece goes on to say, “The problem arises when ESG is used as the means to the end of creating a sustainable global financial system, where capital flows are directed, societal outcomes are targeted over returns and asset prices are effectively controlled…”. While we’re not sure why someone would object to having a “sustainable global financial system,” the larger concern is that this statement is potentially misleading, significantly at that, but is presented as fact within the confines of an opinion piece.
The fact is that “ESG Funds” (and “Sustainable Funds”) have a wide range of mandates. Some are willing to target societal outcomes over returns – look for the term “Impact Fund” if that is your goal. Also, many funds integrate ESG concepts into the investment process even though they are not labeled as “ESG Funds,” precisely because it helps to identify risks and may help to enhance long-term returns.
Separating fact from opinion takes critical thought, and interpretation requires understanding of complexities and nuance, especially when the pace of things are changing at the rate of ESG investment. We recommend seeking out trustworthy sources of information (for example, OWL ESG offers the most reliable and up-to-date ESG data available for investment decisions). Opinion pieces can be fun, but should not be mistaken for research-backed articles, especially when the source has a potential incentive, like a book to promote.