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RIP ESG?

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How ESG investing came to a reckoning

The term ESG is less than two decades old, but it may already be coming to the end of its useful life.

Investing within an environmental, social and corporate governance framework is now the fastest-growing segment of the asset management industry. But the term has become an increasingly broad catch-all for a range of approaches to investment: everything from negative screening (removing sectors such as tobacco or defence) to positive screening (picking sectors such as clean energy), to really any kind of strategy that promises to bring about positive social or environmental change.

While this flexibility can be a positive thing, there’s a fine line between flexibility and ambiguity, and ESG’s critics say some companies and investors are using the loosely defined term to “greenwash,” or make unrealistic or misleading claims, especially about their environmental credentials, as we report in this Big Read.

Those criticisms came into sharp focus on May 31, when German police raided the offices of asset manager DWS and its majority owner Deutsche Bank as part of a probe into allegations of greenwashing. It was the first time that an asset manager has been raided in an ESG investigation and signals a moment of reckoning for the industry.

It’s a “real wake-up call,” says Desiree Fixler, the former DWS executive who blew the whistle on her company for allegedly making misleading statements about ESG investing in its 2020 annual report (DWS denies wrongdoing). “I still believe in sustainable investing, but the bureaucrats and marketers took over ESG and now it’s been diluted to a state of meaninglessness,” she says.

On top of the allegations of greenwashing at the industry’s highest levels, there is the impact of Russia’s invasion of Ukraine, which is forcing companies, investors and governments to wrestle with developments that at times appear to pit the E, the S and the G against one another. For example, governments in Europe are reneging on environmental goals by turning to fossil fuels to reduce dependence on Russian gas, in order to fulfil ethical goals.

“The war in Ukraine is an incredible challenge for the world of ESG,” says Hubert Keller, managing partner at Lombard Odier. “This conflict is forcing the questions: what is ESG investing? Does it really work? And can we afford it?”

Meanwhile don’t miss our profile of Stefan Hoops, the Deutsche lifer who took over at the helm of DWS following Asoka Wöhrmann’s resignation.

“The problem is that Hoops [who spent most of his career in sales] has no asset management experience at all,” said one investor, adding that the change at the top of DWS may just be the “first step” in a wider shake-up of the company.

Is is time to stop using the phrase ESG? Email me: harriet.agnew

BlackRock investors take voting power

With pressure mounting on the largest US fund managers over their influence on public companies, BlackRock has revealed the early results of its new programme to hand control of voting on shareholder proposals back to clients who control $2.3tn in index fund assets.

The owners of more than $530bn are now instructing the firm how they want to handle voting on directors, executive pay and climate change, among other hot issues. That’s up by $120bn in the five months since the firm rolled out its VoterChoice programme to institutional investors in 650 pooled funds. Retail investors are excluded because of laws and regulations that vest voting power for mutual funds and exchange traded funds with their boards not their investors.

The information dump comes right ahead of a Senate Banking Committee hearing about index fund voting. Republican Dan Sullivan will testify about his proposal to prevent index fund managers from voting on shareholder proposals unless they have the explicit consent of large institutional shareholders. Conservatives have criticised BlackRock and the other asset managers when they have supported liberal shareholder proposals on environmental, social and governance issues.

Intriguingly, half of the investors who expressed a point of view through BlackRock’s VoterChoice programme told the firm to go ahead and vote their shares as it saw fit. Only 5 per cent took control themselves and the rest asked for more information.

State Street said that its clients with separately managed accounts already have the power to vote their shares and both Vanguard and State Street are exploring whether investors want them to extend voting rights to pooled funds.

Chart of the week

Investors are starting to worry again about high levels of government debt in the eurozone, as the prospect of rising interest rates revives concerns that have largely lain dormant in recent years.

Borrowings by debt-laden countries including Italy, Greece and Spain have increased in the decade since the region’s sovereign debt crisis — in part because of the coronavirus pandemic’s drain on government finances.

Markets were more willing to fund those large debt piles while borrowing costs were ultra-low and the European Central Bank was continuing with its massive bond-buying programme. But the ECB’s plans to withdraw such stimuli — with an end to asset purchases and a quarter-point rate rise planned for July — mean the bonds of these southern European nations are once again under pressure.

Borrowing costs for Italy and Greece have climbed sharply, with Italy’s 10-year yield hitting its highest level since 2014 on Friday — although they remain far below the heights scaled in 2012. Still, the worry for many investors is that a sustained rise may reignite concerns over how manageable Rome’s or Athens’ debt loads are.

“I think the situation’s worrying but not critical,” said Antoine Bouvet, senior rates strategist at ING. “Sometimes the markets can talk themselves into a frenzy and lose confidence,” he said, adding that it becomes a “self- fulfilling prophecy”. 

10 unmissable stories this week

State Street denied it was in talks to acquire Credit Suisse, knocking back a report that it was pursuing the troubled Zurich-based lender. Tale about an unlikely combination between the two left many looking credulous.

Bridgewater, the world’s biggest hedge fund, is betting on a sell-off in US and European corporate debt, as it anticipates an economic slowdown. Greg Jensen, co-chief investment officer, said: “We’re in a radically different world.”

BlackRock thinks other investors are anticipating too much tightening of the European Central Bank’s monetary policy. The world’s largest asset manager reckons the eurozone’s fragile economy and sensitivity to government borrowing costs are likely to slow the pace of tightening.

More and more financial professionals are questioning whether the CFA qualification — dubbed the “hardest exam in finance” — is really worth the bother, as demand for the test “falls off a cliff”. 

“The product is dead. There’s no more Spacs,” said one lawyer who has ridden the boom in blank cheque vehicle IPOs. Spacs have raised only $12.7bn this year, a fraction of the $166bn they raked in last year. And the number of deals is down from 226 last year to 50 so far in 2022.

There is a new sheriff in town for private equity. Lina Khan, who took over last year at the Federal Trade Commission, has promised a “muscular” approach to policing buyout groups, warning of the “life and death consequences” of these firms controlling large chunks of the economy.

Billionaire investors are ramping up their already hefty exposure to private equity through family offices in spite of concerns that the end of ultra-loose monetary policy will prompt a shakeout of weaker buyout managers.

Legal and General Investment Management says nutrition has become a “systemic risk for companies” as investors and governments try to put big food groups on a healthy diet after the pandemic put obesity back in focus.

Wall Street market swings are getting sharper. This is in part because of “terrible” liquidity, the worst since the early days of the pandemic, making it harder for traders to seamlessly buy and sell stocks, bonds and other financial securities.

Equity hedge funds, which manage around $1.2tn in assets, are struggling to adjust to a dramatic change in market conditions, leaving them on track for their worst year on record after they lost lost 8 per cent on average in the first five months of 2022, according to data group Hedge Fund Research. This outstrips losses in other years marked by crisis, on HFR data going back some 32 years, and leaves funds with a huge task to recoup losses over the rest of 2022.

And finally

Femme qui marche, 1932-36, by Alberto Giacometti, in the courtyard lounge at Hôtel d’Orrouer © François Halard. Christie’s Images Limited

I was in Paris last week and the talk of the town was the upcoming sale at Christie’s of Hubert de Givenchy’s exceptional collection of works of art from his last two residences, the Hôtel d’Orrouer in Paris and the Manoir du Jonchet in the Loire valley. During his lifetime, the legendary couturier brought together an exceptional collection of 17th and 18th century furniture, as well as masterpieces by the likes of Pablo Picasso, Alberto Giacometti and Joan Miró. The quintessence of elegance and the grand goût français.

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