BJR On Climate
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BJR On Climate

ESG investing — not so much about ethics, but it can still have impact

My favourite economics question from high school was, “When do you cut your trees?” Turns out the answer is that we need to start planting a lot more…

The quick tl;dr

  • ESG stands for Environmental, Social, and Governance. Some people assume the E is ethical. It’s not. In fact, ESG as a label does not indicate any ethical investing, but indicates a financial approach to measure risk and return that take environmental impacts, social impacts and governance into consideration.
  • Financial institutions take environmental (climate) risk seriously, regardless of what the political scene says.
  • There is some change in the market because of consumer demand, but mostly it’s driven by financial risk at this point.
  • In Australia, about 1/3 (1 trilllion) of the investments are now under the “ESG umbrella”. This is much bigger than I expected.

My background in “ESG”

The panel at UNSW

How to determine if something is “ESG”?

  • Hedge funds are looking at the short side. I.e. what companies are vulnerable because of climate risk or other ESG risks. This is amazing — the firms often viewed as the greediest know there is money to be made on the ignorance of corporates who are not prepared for climate change.
  • The growth is very much in integration, not in ethical or impact investing. Minimal filtering is being done — it is largely focused on risk. “Risk is moving the industry.”
  • Governance — the “G” in ESG, really means regulation, the theory being that smart governance is good for financial stability of our economies, but again doesn’t move investments for ethical purposes.) The EU has requirements on “sustainable finance” which will (or does?) incorporate ESG.
  • The Environmental (“E”) part of ESG again doesn’t mean animal rights or love of nature, but needs to assess the potential impacts on business from drought, flood, or climate change. Making financing take into account the Paris climate goals is where “sustainable finance” will interact with the environmental policies of organisations like the EU.
  • What will likely appear is a “Colour coding” of investments (Green= low ESG risk), much like bond rating (AAA, AA, etc). A green rating would get you a lower cost of capital, so that motivates corporations to move towards a Green rating.
  • The state government of California has created a sustainable finance roadmap — focused on climate impacts. Australia sustainable finance has been industry led, then government supported in Australia, largely due to inaction on the part of the federal government in this sector.
  • Free trade agreement with the EU (e.g. between Australia and the EU) would likely come with some ESG requirements — the EU won’t want to disadvantage their own producers by allowing cheaper ‘dirty’ products from other countries into their market.
  • Super funds — longer term investment (low ESG risk) is the main motivation driving their attention to ESG, not consumer demand. Though, millennials are changing this, and social media campaigns and new companies have made it much easier to switch funds, so this may change.



My focus for the foreseeable future is going to be on climate change in Australia.

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