The purpose of a company should extend beyond meeting environmental targets to creating wider value

The set of ESG standards that have developed in the industry to evaluate how companies operate with respect to the world around them, the people and whether they responsibly govern themselves are the traditional ways investors have been screening.

These rating tools have less weight lately.  In fact, the backlash against investing strategies that factor in environmental, social and governance issues is rising in the US, according to an HSBC survey.

 

The reason behind this is that the purpose of responsible investing goes beyond a mere scoreboard to asset selection, which actually does nothing to improve the world.

It is about making an impact by providing stewardship to corporations to respond to social and environmental needs.

 

Lately, we have seen resolutions plunge among the largest asset managers, pulling back support on climate and social stakeholder proposals because they lack economic merit.

A recent example is BP’s performance, which underperformed its peers, generating adverse reactions from its investors. BP has set ambitious plans to transition to green energy and reach net zero targets by 2050. Bluebell, an environmental activist investor, urged BP, which trades at 40% less than ExxonMobil and Chevron, to focus on its core business, oil and gas, and less on the green energy sectors with lower returns.

 

In contrast, investors at ExxonMobil, which reported its second-best annual profits, withdrew a climate resolution after the company sued them for demanding an acceleration in the pace of reduction in greenhouse emissions.

Exxon has set ambitious goals to target emissions by 2025, but notably, it has no target to cut Scope 3 emissions, which are indirect emissions that occur in the value chain.

 

BlackRock, Fidelity, Vanguard and State Street the most significant funds by assets managed- were among the most reluctant to back proposals. They backed just 14% of environmental resolutions compared to 39% a year ago.

 

It’s been a rough year for funds that focus on environmental, social, and governance factors, or ESG. Adverse politics, including regulatory changes, geopolitical tensions, performance, and product design, have weighed on the sector. 

ESG funds struggled to perform in recent months, and more than 120 were renamed or updated their strategies.

 

 

Despite the challenges, the rise of impact funds that measure actual world outcomes is promising. For instance, the Swedish private equity firm EQT aims to raise €3bn, potentially creating the largest-ever impact fund in Europe.  These funds are actively seeking carbon improvers and companies that facilitate a faster transition, promising a brighter future for responsible investing.

 

Our perspective is that for companies to truly embody responsible strategies, their sustainability goals should align with their purpose.

The purpose should extend beyond meeting environmental targets to creating wider value.

By focusing on factors such as business model durability and strength, companies can create sustainable value that goes beyond the ESG scoreboard.

Emphasis should be placed on factors such as business model durability and strength that create sustainable value.

 

Subsequently, investors should promote long-term value creation rather than demand changes in business operations. Instead of taking the ESG scoreboard approach, they should look at opportunities that will or have a positive impact on the world.

 

At this stage, it’s crucial for regulators and governments to take a systemic approach to tackling environmental challenges. This includes implementing measures like carbon pricing. Such a systematic approach not only addresses immediate environmental challenges but also generates the necessary funding to accelerate the progress of alternative energy sources, providing a path for future progress.