Will 2024 Be the Year to Challenge ESG Investing? By Craig Shirley
Many of these crimes can be committed in other aspects of business and government. However, ESG gives sophisticated financial criminals a big opening.
Will 2024 Be the Year to Challenge ESG Investing?
By Craig Shirley
February 18, 2024
If you read the financial media over the last year, you could not help noticing the prominence of Environment, Social and Governance (ESG) in making investment decisions, on the same level as profits.
Companies touted their commitment to clean energy and green programs, social fads such as Diversity, Equity, and Inclusion (DEI). It did not matter what the company’s product or service was. It needed to embrace diversity—or at least publicly state it. Corporate governance policies that took into consideration labor relations, and higher wages were hailed.
Corporations that were once viewed as pillars of the economy and which kept the United States moving, while employing millions of people, have become social experimentation factories. It is no longer enough to be productive and profitable, a company has to “think” the right way.
Thus far, 2024 has seen a pushback to these policies.
Activist investor Giuseppe Bluebell Capital has raised objections to the business strategy of energy giant BP. Leaders of the company planned to get it to “net zero,” by 2050. This occurs when carbon emissions are balanced by reductions in greenhouse gases.
“This was as a result of a strategy which was intended to blindly shrink BP’s core business in oil and gas and venture in other business in clean energy where, quite frankly, it is highly debatable whether BP has any chance to succeed,” Bivona toldCNBC. “The path to get to net zero by 2050 is very narrow, which means it is very unlikely that we are going to be at net zero in 2050. But I think it is very rational for a company to make as its base case a scenario which, actually is very, very unlikely to happen. And on that front, we are not asking BP to renege on its strategy, but to adapt its strategy to the reality.”
While some of the goals of ESG investing may be admirable, it has been found that companies who have widespread ESG programs may be susceptible to bribery and other forms of corruption.
Banks have been rating some companies’ risks based on their dealings with suppliers and even in foreign countries. As the Financial Times recently reported, Japanese companies face legal risks if they adopt ESG policies that are not precisely followed.
A thorough analysis by researchers at the London School of Economics is a stern warning to companies implementing ESG investing. The main sources of corruption identified in the report include: money laundering, climate washing, bribery, and tax fraud.
Many of these crimes can be committed in other aspects of business and government. However, ESG gives sophisticated financial criminals a big opening.
One of the main risks to companies is “climate washing.” The London School of Economic report defined this as “acts that mislead investors, consumers or the general public regarding climate-related impacts or outcomes, or overstate an actor’s climate performance. Climate-washing can create a false sense of confidence around the implementation of climate action, potentially leading to complacency and delaying effective solutions.”
These can include public statements by companies, social media activity, or any other communication that falsely promotes the company’s actual carbon reduction impact. The nuclear industry trumpets its clean energy bona fides at every turn. Closer evaluation of companies’ public presentations may reveal overstatements and unrealistic returns.
The efforts to make energy companies more “socially responsible” is fraught with risks that put companies in legal or financial jeopardy, or at the very least, damage their reputations. Investors and the public are finally asking questions about the benefits of ESG policies and if they help or hinder a company’s profitability.
The warning signs are there. It is time for companies to examine its policies through a lens of reality.
Craig Shirley is Chairman of Citizens for the Republic.com.