Activists took to the streets of London recently to protest against the role played by the city’s leading financial institutions in accentuating the effects of climate change, gluing themselves to the offices of firms including the London Stock Exchange and Goldman Sachs.
Just two days earlier, Goldman Sachs had published its annual sustainability report outlining its commitment to the amelioration of some of the most pertinent social and environmental issues our generation faces. The report’s content, hailing the firm as the first of its kind to publish metrics under the Sustainability Accounting Standards Board, is indicative of the financial community’s increasing focus on ESG (Environmental Social Governance) when making investment decisions.
As the effects of environmental change continue to garner ever greater international attention, the financial sector has also appeared to acquiesce to a new-found social consciousness. Firms have amalgamated goals for political institutions, such as those established by the UN in 2016, with key performance indicators used to assess private sector performance.
This trend has gained significant traction in recent years, described by Forbes as combining “both the rigorous analytics of traditional investment and the heart of philanthropy.” In effect, investment decisions are increasingly being influenced by a stock’s capacity to attain a measurable social and environmental impact alongside financial return. Indeed, the stratification of stocks based on ESG metrics within their own asset class shows lucrative investment potential - JP Morgan surmises that ‘Impact Investing’ offers the potential for up to $400 billion in invested capital over the next 10 years.
However, in light of the recent climate change protests, the growth of ESG strategy as an investment benchmark is undeniably problematic. When applying social motives to a framework that ultimately depends upon economic gain, questions are raised surrounding which social causes will warrant the biggest returns, and thus will merit the most attention.
Decisions that before concerned only the rationality of financial ratios become increasingly subjective due to the intangibility inherent to defining a stock’s social impact. Inevitably, this framework fosters a hierarchy which favours the investment potential of some social issues over less profitable causes. Can the prioritisation of a particular cause be justified, even if the benefit it brings, however limited, is to the detriment of the progress of others? Or indeed, how can the worthiness of a cause ever be appropriately measured?
Of course, these questions are not exclusive to impact investing, and are indeed inherent even to pledges of support to charitable bodies in the non-profit sector. Perhaps this even justifies the increased attention given to impact investing over charity; it at least provides a starting point from which to navigate the identification and prioritisation of social issues, through the enticement of their economic return.
The issue is also raised as to how we actively measure a company’s social impact. The Financial Times notes that despite the perceived progressiveness of many ESG portfolios in their decision to invest in biodiesel over oil stocks, with the rationale of choosing the less environmentally harmful option, their efforts are blindsided by the unsustainability of this industry itself. Whilst originating from a renewable source, palm biodiesel still succeeds in producing up to forty times more greenhouse emissions than its non-renewable counterpart. Being selected as the ‘better’ alternative in terms of renewability, does not account for its own objectively harmful impact on the environment.
This can be applied to stocks across a variety of industries now bought under the pretence of facilitating environmental or social progress, which in reality, still fail to affect positive change. Again, the subjectivity in evaluating decisions traditionally based on the rationality of risk versus return, renders both the efficacy of stocks’ impact, and how this is defined, more difficult to ascertain when made in the name of impact investing.
Then there is of course the undeniable difficulty that banks have in reconciling their social investing efforts with the reality of their own social and environmental legacy. Aside from an abysmal effort to curb their complicity in the environmental damage they purport to fight against (the Sierra Club notes that the world’s top 33 financiers of fossil fuels have pumped $1.9tn into the industry over the three years since the Paris climate accord was signed in late 2015), the morally questionable behaviour of Britain’s financial institutions undermines their image as bastions of social and environmental progress. Goldman’s upcoming trial over its involvement in the Malaysian scandal involving missing state funds, or JP Morgan’s failure to remedy its gender pay gap, are prime examples. Ultimately, the limited progress made by these institutions in rectifying their own practices is at odds with the socially conscious image they wish to promote via their allegiance to impact investing.
It would appear that this increased consideration of ESG factors in investing is driven more by a desire to appeal to investors, than a genuine will to ameliorate social and environmental concerns. Ultimately, the inclusion of ESG strategy demonstrates just how limited the impact of this perceived greater social and environmental consciousness adopting by the financial sector really is.