Transcript: Is ESG over? 

This is an audio transcript of the Unhedged podcast episode: ‘Is ESG over?’

Katie Martin
E, S and G are possibly the most explosive, divisive three letters in the English language, at least in financial markets circles.

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The idea that investors can put their money to work along the grounds of environmental, social and governance agendas basically; use their money to do good. It’s in serious trouble. It was the hottest thing in finance. It was the hottest thing on Wall Street and in the City of London for the longest time and now all of a sudden, it’s taking flak from all angles and we are going to ask, is ESG dying? This is the Unhedged podcast from the Financial Times and Pushkin. I am Katie Martin, a markets columnist at the FT in London. And unusually today, I’m joined by an Unhedged podcast newbie, Simon Mundy, who’s the editor of the FT’s Moral Money. Simon, thank you so much for rocking up and talking to us. Has anyone ever questioned Moral Money as a label? Is money moral? Has anyone ever taken the mickey?

Simon Mundy
Yeah, very much so. So one nice thing about the name, apart from the fabulous alliteration, is that it pushes certain people’s buttons, and I think there’s an assumption that we might be finger-wagging and moralising. But really, what it’s about is digging into the ethical questions that underscore business, finance and capitalism as a whole. And as we’re about to discuss, this is a great time to be exploring those questions.

Katie Martin
So, I mean, God, where do we even start with this thing? It’s just become such a kind of fevered scene around ESG. But certainly when you first took on Moral Money, it was red-hot. Every asset manager on the planet was saying, you know, we’ve got a better ESG strategy than those guys down the road. It was a real kind of competitive point. What has changed?

Simon Mundy
Yeah. So as you say, I started this particular job in the autumn of 2021. So just in the run-up to COP26. And then there was this tremendous sense of momentum around private sector and public sector government action also, but in particular in the private sector, it was very notable. There was this sense of finally, people are finding religion on climate stuff.

Katie Martin
Yeah.

Simon Mundy
And of course, at COP26 that was the big launch party, effectively, among other things, for Gfanz, the Glasgow Financial Alliance for Net Zero, which was launched with huge amounts of fanfare under the leadership of Mark Carney and Michael Bloomberg. And you might remember that there was this press release which went out from Gfanz saying $12tn of managed assets has been rallied behind the standard of net zero. And I remember seeing that, and it just reminded me a bit of, do you remember when, after the invasion of Iraq in 2003, George Bush did that press conference on an aircraft carrier with this banner behind him saying mission accomplished? And it reminded me a bit of that because, yeah, most of the biggest, at least western financial institutions had signed up to this, but had signed up to what exactly? There was very little costs involved immediately and up front for these big financial institutions. But then when the rubber really started to hit the road, when conservative politicians in the US in particular started pushing back against this, we’ve seen a lot of that early enthusiasm fall away.

Katie Martin
No. Exactly. And so, as you mentioned, it has become like a real political hot potato in the States. It’s a real kind of blue state, red state thing. The Republican-controlled states, depending on who you listen to, will describe ESG investing as, you know, something approaching like some sort of, you know, satanic communism that’s a kind of rejection of capitalism. What is it about ESG that, like, pisses people off so much? It seems that it’s just like low-key annoying for a lot of people. But it’s like massively annoying for, you know, rightwing politicians in the States. Why does it get people so hot under the collar?

Simon Mundy
Well, I think it’s particularly in the US that it does get people hot under the collar. The sort of more proximate reason the last couple of years has been that conservative media, notably Tucker Carlson during his cut-short career on Fox News, decided to really make it a drum that he kept on beating. It was really, I think, blown out of proportion as this sort of stalking horse for all sorts of great social changes. But the larger structural reason goes back much, much longer. And I think it is to do with the huge clouts that oil and gas companies have historically had in the US. So companies, including ExxonMobil, it’s well-documented that they funded various sorts of sort of pseudoscientific research and tended to create the impression that there was uncertainty about the causes of climate change.

Katie Martin
Which there isn’t.

Simon Mundy
Which there isn’t, to be clear. I mean, the reason why so many people contest the climate science, of course, is because it’s bloody inconvenience for a lot of people who’ve been making a lot of money from the fossil fuel economy, which is one of the biggest parts of the economy and has been for literally centuries. There are going to be a lot of losers among this very, very wealthy and powerful group of people who have had a lot of money to disperse on various politicians on the right in the US as well as various think tanks who have been promoting this agenda. So I think that really helps to explain it.

Katie Martin
So it’s become a really difficult terrain for investment managers to navigate when they go to the States and sell their products. I guess for me, a few things have really gone wrong since then. First of all, a lot of these funds lately have just sucked because they haven’t got very many oil stocks in them for obvious reasons. And oil stocks did really well after Russia’s invasion of Ukraine. The other thing that went wrong around Ukraine is that that forced a massive rethink on all of those investors who said, right, we don’t buy defence stocks because they don’t fit our criteria. Suddenly it became, oh, hang on. I think perhaps now we do buy defence stocks for the companies that are arming Ukraine. So that kind of chipped away at the rationale for a lot of this. But then a couple of things have happened since then quite recently, right, just this year. One of them is Exxon, the oil company is kind of an Empire Strikes Back moment, right? It’s suing some activist investors. And there’s also this thing called Climate Action 100, which is supposed to be this kind of collection of big investment houses, you know, all kind of getting together to make the world a better place. Tell us about what’s going on there, because this has all gone very pear-shaped, hasn’t it?

Simon Mundy
Yeah. So these are two really, really interesting case studies which both tell you quite a lot about where we stand in this space. So to start with, the ExxonMobil one. Seems to me that Exxon’s real target here is not actually Follow This, the Dutch activist group which brought the petition. It’s the SEC, the Securities and Exchange Commission of the US, which a couple of years ago changed their rules to make it slightly easier for these sorts of activist groups to do what Follow This did, which was to buy a relatively small number of shares in ExxonMobil to use their capacity as a shareholder, then to propose a resolution at Exxon’s shareholder meeting that would require the company to do more on reducing its emissions.

Katie Martin
So you buy shares in an oil company and then basically tell it to stop producing oil.

Simon Mundy
Yeah. Now you are a part owner of the company, even if you only own a few shares, and therefore you have the rights under these SEC rules to try and bring a resolution which would in the best case, as has happened a couple of years ago, actually, someone did this and actually managed to get a couple of directors onto the Exxon board. But even if you don’t succeed, you’ve embarrassed the company. You forced them to put it on the agenda, discuss it at the meeting. And companies just in many cases don’t like this. ExxonMobil then decided, right, enough of this. We’re going to file a lawsuit against Follow This for filing a frivolous resolution and interfering with our corporate business. Follow This then thought right, well, we definitely can’t afford to fight this suit with Exxon. We withdraw the shareholder resolution. But Exxon then interestingly said, OK, fine, you can do that. But we’re still gonna keep on suing you. And I think the reason they’re doing that, and they’ve made it quite clear in their public messaging as well, is that they really don’t think Follow This and similar activists should be allowed to bring these sorts of resolutions in the first place. And they want to force the SEC to change its position. They want the courts, in fact, to establish a precedent which forces the SEC to change its approach.

Katie Martin
But you talk to a lot of ESG pointy heads, right? I mean, they must think, you know, if this succeeds, this basically completely knocks out shareholder activism, right?

Simon Mundy
I don’t think it would come to that. I presume what Exxon would be wanting is that you have to own a certain number of shares in the company, or perhaps you have to have owned them for a certain period of time. I don’t think that trying to say that shareholders in general shouldn’t be allowed to file resolutions, but just that an activist group can’t buy a token number of shares and take it from there. Now, the second one that you mentioned for me is even more interesting.

Katie Martin
Yeah. So for those who are completely unfamiliar, what is Climate Action 100? 

Simon Mundy
100+, because there’s now more than 100 companies. Climate Action 100+ is a grouping of asset managers, and it was set up to try and form a group that through which these asset managers could push the companies they invest in to do better at climate change. And there were two phases. First phase, they’re gonna push these companies to give more information and better information around their environmental risk and impact. So far, so good. No one can argue against more information, or you can argue that it imposes costs and hassle on the companies, but that’s relatively plain vanilla.

But the second phase was when they were saying, right, now we’ve got this information. We’re gonna push these companies to reduce their emissions. And that’s really a qualitatively different thing. You’re no longer just asking for information. You are now telling companies how they should be behaving and how they should be running their businesses in a way that may or may not be in the interests of your customers, your investors, the people that have got their money in your fund. So that’s when it gets more complicated. That’s what the conservative politicians in the US have been particularly vocal about. And that is why you’re now seeing some of the biggest US institutions pulling away from these initiatives.

Katie Martin
Yeah, these are some big-name investors, right? State Street is gone. JPMorgan Asset Management is gone. Pimco has gone. BlackRock has kind of semi gone.

Simon Mundy
BlackRock, I mean it’s very interesting what BlackRock’s been doing more generally because if you’re Larry Fink you’re in a kind of strange situation. Mr BlackRock, the chief executive and founder of BlackRock. I mean you are one of the most powerful people in global business, one of the most powerful people in the world. There’s always a risk it’s gonna go to your head a bit. I mean, he’s only human like the rest of us. And one interpretation of what happens at BlackRock is that maybe it went to his head a bit in the sense that two or three years ago, Larry Fink was really presenting himself as the standard bearer for enlightened capitalism. We, as BlackRock, are in a position of great influence, and we have a responsibility to use that influence and power for good to align these assets that we manage with net zero, with the energy transition. And that might sound unimpeachable.

The problem is that these Republican politicians in the US, some of the objections they make is silly, but not all of them are silly, actually. And there was one particular exchange a while ago, which I found very interesting when it was a group of attorneys-general in the US who wrote a letter to BlackRock and they said, look, you have said that you are going to align your investment decisions that you make on behalf of your clients as a fiduciary. You’re going to align those decisions with a 2050 net zero emissions scenario.

The problem with that is that according to the top climate scientists, according to the Intergovernmental Panel on Climate Change, unfortunately, that looks unlikely. Therefore, you are basing these long-term investment decisions on a scenario that is unlikely. Therefore, that cannot be in the interest of your clients. You have to make these decisions based on the scenario you expect to see, not on the scenario you would like to see. BlackRock replied to that letter, saying, we cannot just ignore climate risk. Climate risk is a financial risk. Really, just begging the question and not properly answering it. And I thought, in my personal opinion, and even though I have a lot of problems with a lot of things that come from Republican politicians these days, that letter from the attorneys-general was written by one or more very good lawyers who made some good points under the law. And BlackRock’s response came across as a lot of hand-waving, actually. So there are some serious points there.

And now I think these asset managers are taking it seriously. And the reason why, for me, as someone who wants to see a serious response to climate change, the reason why I’m not necessarily unhappy about this is because I think what needs to happen here is changes in government policy. And perhaps we’ve been kidding ourselves for too long that government policy can kind of not change that much but the private sector will take care of it.

Katie Martin
But the private sector will save the world.

Simon Mundy
The private sector will take care of it. So I think we’re now waking up to the fact that that’s pretty unlikely to happen.

Katie Martin
Yeah. So there’s a lot there. But you put it all together. You have the kind of recent poor performance of ESG funds. You have this sudden questioning around what it really is and how it should work and how, you know, one person’s high moral standing is not the same as another person. So it’s really difficult to kind of cookie cutter this. Then you’ve got all these tensions around the Climate Act 100+ group, around the Exxon situation. Put it all together. For you, Simon, do you think ESG is like in trouble? Do you get the impression that, you know, certainly like I couldn’t move for people talking to me about ESG a few years ago and now, (makes whooshing sound) nobody mentions it. It’s not on the websites. It’s not in the conversations. You know, it’s just sort of disappeared. Is it dying?

Simon Mundy
I think we should zoom out a bit. So the fossil fuel age, you know, you look at what’s happened in terms of technology, human population, life expectancy, you name it. The fossil fuel age has been by far the most transformational period of human history. We are now talking about the end of the fossil fuel age. This is one of the biggest things that has happened in the history of human civilisation. So is ESG in trouble? ESG, as it’s been constituted as this sort of branch of the financial markets, this branch of the business sector where people pursue things that are not necessarily financially viable, where it’s not sort of in line with normal business logic, the sort of ESG agenda per se, that may be on its way out, or at least in its current form. But that’s not necessarily a bad thing, because the energy transition is happening, and what’s needed is to make sure that happens in the most effective and fair way possible. So that’s gonna require things like serious carbon pricing from governments. That’s a conversation that needs to happen. There has been concern over the past few years because everyone’s saying no, you know, that the Davos guys are gonna sort it out.

Katie Martin
No, sure, they’ve got a good track record there sorting it out. 

Simon Mundy
So don’t worry about the government, you know, and now, perhaps, we move on to a more serious stage of the conversation where we update the rules and laws surrounding the capitalist business model. And then maybe we then say to the businesses, OK, now you can just go and make money. And that’s fine, because the laws are such that what makes money for you now is going to be aligned with sustainable outcomes for people and planet. We are a long way away from that, but I think that should be the target.

Katie Martin
So the label dies but the movement, for want of a better word, doesn’t.

Simon Mundy
Yeah, fundamentally. I mean, if you look at what’s happening with “ESG investments”, things that are labelled as ESG funds have been going through a tough time both performance-wise and in terms of flow, as you mentioned. But any asset manager who is not thinking about these factors — be it to do with environmental risk, to do with the energy transition, to do with labour rights and abuses — if you’re not thinking about those things, you’re really letting down your end investors. And so I think everyone is now incorporating these factors. You can call it ESG or you can just call it taking all risks into account. As to whether things labelled as ESG grow and thrive, that for me is really less of a concern than the bigger picture.

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Katie Martin
Right. Yeah. Big shifts. Good stuff. Thanks so much for taking us through that. We will be back in a minute with Long/Short.

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Welcome back. It’s time for Long/Short, that part of the show where we go long a thing we love, short a thing we hope. Simon, you are uninitiated up till today on the Unhedged podcast. But this can be anything. It can be food. It can be something to do with ESG. It can be a sport; whatever you like. What are you long or short of?

Simon Mundy
I’m long legacy media. (Katie laughs) Now, I should declare an interest. My salary is paid by legacy media. The FT is very much legacy media. We’ve been around for how many years? 135 or something like that. So I have a clear interest in this, but nonetheless, I’m long legacy media. And the reason has to do with AI. The sophistication and depth of the misinformation that is now being propagated through AI. You’ve probably had the same experience as me of being quite surprised by how many people, including quite well-paid, sophisticated people in recent years. When you ask them where they get their news, they’ll just say, from social media. That is becoming increasingly untenable because social media is so full of these things that even very clever people can’t really tell whether or not it’s real or not real. You’re going to need to pay people like the FT or like our rivals to put in the hard work of figuring out what’s real and what’s not, and giving you a daily digest of what’s actually been happening that’s not in the form of deepfakes. So for that reason, I’m long legacy media.

Katie Martin
Long legacy media, says legacy media man. For what it’s worth, I’ll agree with you. I’m afraid I’m also long. I am long Sam Bankman-Fried. He’s back, the FTX guy. He obviously was found guilty on, I believe it was seven charges of fraud and money laundering. His lawyers are basically appealing for a short sentence. In theory, he could go down for 100 years. Seems excessive. His lawyers are looking for something more like five-and-a-half to six-and-a-half. So be lucky. They are describing him as a selfless, altruistic philanthropist. He just happens to have been found guilty on seven counts of fraud and money laundering. But thank heavens for SBF because he is the story and the gift that keeps on giving.

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Once again, Simon Mundy from Moral Money at the FT. Thank you so much for joining us today. We’re gonna have to leave it there.

Simon Mundy
Thank you very much, Katie.

Katie Martin
If you like the sound of what Simon specialises in then you’ll be delighted to know he has a Moral Money newsletter. Sign up today.

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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer. I’m Katie Martin. Thanks for listening.

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