Opinion: The ESG investment industry is down


James Rasteh is the Founder and CIO of Coast Capital Management.

I grew up in France, where the French Declaration of Human Rights – Liberty, Fraternity and Equality – was at the heart of our value system and seemed guaranteed for everyone. My parents then moved to Western Canada, where I became a young activist. I have often found myself protesting the destruction of natural habitats like the Carmanah Valley in British Columbia, which seemed in perpetual threat of clearcutting.

Eventually, I joined the New York boards of organizations such as Human Rights Watch and Pachamama, which respectively protect human rights around the world and prevent the destruction of the Amazon in Peru and Ecuador. .

By the time I was appointed head of international investments at a well-known activist hedge fund, I was engaging with the boards of directors of companies such as Petrobras to stop the construction of unnecessary and environmentally disastrous pipelines. across the Amazon. I was over and over again disappointed that other investors didn’t seem to care.

The rise of the environmental, social and corporate governance (ESG) investment industry therefore interested me a great deal. It seemed that the community had finally developed its awareness and belief in taking sustainability and societal impact into account when deciding what to invest in. And in a time of extraordinary political dissent, marginalization of minorities and willful ignorance of the facts – especially on the subject of climate change – one might find solace in the new membership of institutional investors in ESG.

Yet, over time, I have come to realize that the ESG investing industry on the whole is little more than a marketing mechanism and will not lead to productive change. Rather than following the parameters of ESG investing and ignoring ‘dirty’ companies (the products society needs), investors who genuinely care about a greener and fairer world and genuinely want a change Rather, they need to take an active investment approach, investing and lobbying the boards of these companies to adopt more sustainable practices.

In 2015-16, for example, I noticed that one of the most important positions held by Generation Investment Management – co-founded by former US Vice President Al Gore and David Blood, chief executive officer of Goldman Sachs assets – was on Facebook. This is a company whose business is to collect every possible byte of its users’ data and resell the information to the highest bidder, regardless of any privacy breaches that arise along the way. which constitutes a systematic (albeit legal?) violation of their users’ privacy.

Facebook has also amplified disinformation with so successful that it came close to shaking the very foundations of democracy around the world. It was an embarrassing revelation that Mr. Gore’s asset management company decided this was the best ESG investment they could find.

But Generation is not the only inefficient player in this industry. Most funds are. Currently, ESG funds must commit to United Nations principles for responsible investment and follow certain “green” investment guidelines – which means they avoid any “dirty” business in the industry. It does not mean anything.

First of all, the UN PRI agency sometimes feels like a revenue-generating unit for this august but defunct organization. Second, once a fund obtains its credentials from the UN, it must follow arbitrary investment guidelines based on inconsistent and often unavailable data. Third, the whole process is retrospective and does not take into account future changes, such as expected future changes in business practices.

The biggest problem, however, is that the process isn’t actually designed to produce positive change. Most companies that genuinely focus on environmental, social, and governance concerns are adaptive and led by principled leaders. The flight of capital to these companies, and far from poorly managed ones, in no way improves the ESG parameters of the companies most likely to pursue destructive environmental or social practices. In fact, it does just the opposite.

Investors would be better able to achieve their goals by allocating capital to large established companies where they can make improvements in governance, environmental and social practices.

Mining, for example, is considered a “dirty” industry, but its products are basic necessities for a prosperous society. Too often ESG-focused investors lazily shy away from the industry. Without the oversight of these investors, these extractive industries are free to pursue their environmentally friendly practices, especially as industrial companies are notoriously reluctant to adopt new processes and technologies.

At Coast Capital, we are working to reverse this trend. We work with some of the world’s leading sustainability experts, geologists and mining engineers to identify key technologies that reduce mining pollution. Some of them significantly reduce pollution by arsenic, sulphates, manganese and heavy metals in effluents by a factor of up to 1000. This is an extraordinary advance in the extraction process.

As investors, we are uniquely positioned to ensure the rapid adoption of cleaner mining practices and technologies. We also almost always insist on improving governance.

Thomas Edison once remarked that no one recognizes opportunities because they come around dressed as hard work. And the same goes for most ESG funds. The collective mantra of ignoring offenders with a passive investment strategy is unnecessary and uninspired.

Investors have to work much harder to truly understand the operations of their invested companies and design appropriate pathways to make them more sustainable. Otherwise, ESG funds will remain a marketing ploy at best.

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