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Don’t let the happy smiley face in my photo deceive you. I seethe at losing my job to this day. The stress on my family. Giving up our London home. Being broke.
The worst thing is that my heretical speech almost three years ago — in which I mused that climate change isn’t as material to portfolios as other risks, such as, you know, recessions and stuff — wouldn’t raise a murmur now. That’s because under Donald Trump the financial sector has performed one of its most hypocritical acts of apostasy ever. It no longer seems to believe in sustainability.
The Net-Zero Banking Alliance has lost its flock and emissions targets linked to financing are being revised, to put it kindly. Meanwhile, good luck finding a portfolio manager who prays to environmental, social and governance-based investing any more. They’ll be too busy dropping once firmly held commitments to divest from fossil fuel companies.
Such is their loss of faith that the Net Zero Asset Managers Initiative “suspend[ed] its activities” in January. The insurance version is also dead. How they judged me in 2022 when I wrote in these pages that such initiatives were “claptrap”.
Were it simply a matter of pragmatism, I’d sympathise. The woke pendulum has swung the other way. Businesses have always followed the money — especially banks. When I ran responsible investment at a big one, survey after survey said clients were turning green. Mums and dads and institutions alike wanted their savings “to do good”. Inflows into sustainable funds hit $645bn globally in 2021, according to Morningstar data, including ESG products. That was a quarter of all inflows.
Banks were also making fortunes out of everything from green bonds to research, as were index providers, consultants, data analytics firms and more. So yes, the demand was there. And now it isn’t. Sustainable inflows last year, for example, were a godless $36bn out of $1.5tn overall.
But hang on. Net zero targets or ESG were never sold to us as shareholder friendly, profit-maximising opportunities. If they were, fair enough. Ditch them — the world has changed. No, they were marketed from the beginning as essential beliefs. Sustainability was one of every bank’s core values. Saving our planet was an asset manager’s purpose.
Such platitudes were never tongue in cheek. They were taken very seriously indeed — as sceptics like me learnt to our cost. But was it all a lie? If not, it is pathetic how easily the finance industry lost its religion. If they never believed in sustainability in the first place, we’ve all been taken on a ride. Who would trust a banker or portfolio manager ever again?
Not to mention the potential mis-selling claims. Hence in my view the finance industry has no choice but to find its faith again. It must quickly remind us of the vital role it plays in making the world a better place.
I still believe this. So do many others. The trouble is that much of Sustainable Finance 1.0 was flawed. Never mind. What matters is bankers convincing us they were genuine in trying. And will be again. So the current backlash is an opportunity — to shed the misguided practices, improve the good bits, while preaching the message that finance is a force for good.
Let’s start with banks. If I were a global head of sustainability, I would remind shareholders that 80 per cent of the world’s energy still comes from fossil fuels. You really want the lights to go out? Mindlessly cutting finance to coal, oil or gas companies makes no sense. Better to engage, help them transition, and spur the economic growth needed to invest in renewables.
I would also point out that half of greenhouse emissions come from just three dozen companies — and 16 of those are state owned. Banks, as well as governments and regulators, should focus their efforts where it counts. Investors too. But asset owners and managers must rectify another costly distraction first. As I have written before, they confuse investing with trading.
Buying or selling shares in a secondary market in itself makes no difference to anything. Equity is permanent capital and for every divestment there must be a buyer — and vice versa. To influence a company you need to own its shares to vote. Exclusion strategies are thus perverse. They are also immoral as you are forcing someone else to own the stocks you exclude. The only “investing” that moves the needle happens in primary markets — venture capital, private equity, direct lending and so on — where actual money is given or withdrawn. Sustainable Finance 2.0 should start here.
And, finally, what of ESG? Despite being blamed for its demise, I am a fan. Not as an approach to picking stocks, although it’s no less legitimate than any form of active management. It sometimes works, mostly doesn’t. Rather, ESG is useful as a measure of “goodness” beyond risk and return. As opposed to the above, regulation here is needed. One score per company, no argument. Only then will people know what they are buying.
Indeed, without trust sustainable finance has no chance. That means being realistic, honest and pragmatic. Fewer trees hugged, more data and coherent solutions. But first bankers must prove to us they believe in it.
stuart.kirk@ft.com
