ESG meaningless in investing

Environment, social, and governance (ESG) investing is meaningless as it was a fad that asset managers have moved past, becoming irrelevant to investment processes and has morphed into impact investing. 

This is feedback from Sygnia CEO Magda Wierzycka, who explained in a recent interview why ESG never took hold in the asset management world and why impact investing has a better chance of solving the world’s problems. 

ESG funds have experienced significant outflows, with over $40 billion leaving this year, as the hype around the investment trend has dissipated. 

The term ESG rose to prominence in the late 2000s, representing a set of metrics used to measure an organisation’s environmental and social impact. 

Over the years, it has become increasingly important in investment decision-making as some of the largest asset managers, particularly BlackRock, have driven interest in the investment trend. 

These funds tend to garner disproportionately higher fees from asset managers due to the active nature of assessing a company’s ESG scorecard. 

Today, this scorecard is based on the company’s implementation of the United Nations’ 169 Sustainable Development Goals (SDGs), and the world’s largest asset managers are demanding disclosures regarding these efforts. 

Asset managers continue to develop a range of ESG metrics to measure the environmental and social impact of today’s companies. 

Some strategies focus on excluding industries or organisations that do not meet certain ESG criteria, while others focus on actively selecting companies with strong ESG profiles.

For example, carbon emissions per unit of revenue are used to evaluate a business’s environmental impact, while employee turnover rates are used to evaluate a company’s labour practices.

The initial hype around these funds has died down, with many pointing to a simple reason – when investment vehicles underperform the market, hype alone cannot sustain interest.

Many ESG funds have failed to outperform the market, missing out significantly on the commodity boom of 2021 and 2022. 

Meaningless for investing

Wierzycka criticised the concept of ESG in the investing world, saying it has become irrelevant to asset managers. 

“ESG is just a buzzword, and many of the larger asset managers, including BlackRock, are beginning to limit the marketing of these funds,” she told Biznews. 

BlackRock CEO Larry Fink said ESG, as a term, has become politically weaponised and has pushed the company to limit its exposure to such funds. 

Wierzycka said she always had a feeling the investment trend would fizzle out, as many asset managers already included ESG considerations in their investment philosophies prior to the concept being popularised. 

“I have always put it down to the G for governance as an example. Is there an asset manager in the entire world who says, ‘I will invest in a company with poor governance’?” 

Good asset managers have always considered the impact of a company’s operations on the environment and society when investing in a business. 

A business would not be viewed as a good long-term investment if its own operations threatened the environment and society in which it operated. Similarly, no asset manager would invest in a company with poor governance. 

“We are past ESG investing. It has become impact investing, and that is more of an area for venture capital and foundations,” Wierzycka said. 

Wierzycka established Braavos Investment Advisers, an early-to-growth-stage venture capital firm based in London that engages in impact investing as an alternative to ESG investing. 

“This is about investing in companies that have a fighting chance of making a difference in some of the biggest issues in the world.” 

For example, Wierzycka’s firm invests in companies trying to find solutions to issues such as food security, renewable energy, and ways to mitigate the effects of climate change.