Detlef Glow
Yes! From my point of view, investors need to rethink how they approach ESG investing and which strategies they will implement, especially when we are thinking about the “E.”
Under the current framework, investors favor companies which have well documented ESG strategies and are well underway to achieving their targets year after year. With the increasing knowledge about ESG investing and the permanently growing amount of data available on the different ESG measures, investors are somewhat convinced that they are doing the right thing, or at least fulfilling what regulators demand of them.
But does this really help to achieve the sustainable development goals, especially when it comes to climate change?
From my point of view, it does move the needle in the right direction, but that might not be enough to foster the change needed.
In more detail, investors who follow a sustainable investment approach prefer to invest in companies with a strong ESG agenda. This may let the share prices of these companies go up and might bring the cost of capital down, as the respective companies may need to pay lower interest rates than their non-ESG aligned peers.
But what does this mean in the real world? If an investor want to sell a stock of a “brown” company, there needs to be a buyer on the other side. This means the stock will not disappear. What if the new owner has no sustainable agenda and wants the respective company to maintain and extend its current business without thinking about the outcome for the environment or any other ESG-related issue? Wouldn’t it be better if an investor with a sustainable agenda would maintain or even increase the ownership in the company and influence the board during shareholder meetings and other active ownership initiatives (engagement) to change the business behavior and to implement a sustainable agenda?
The same is true when it comes to bonds—every company can issue so-called green bonds. This means that even a “brown” company can participate from the lower costs of capital for “green” projects, which in turn frees up internal sources to finance their “brown” projects. We have also seen that some projects financed with green bonds weren’t green at the end.
With all that in mind, I think that we need to rethink ESG investing. There needs to be more room for activist investors who are willing to drive the change toward a sustainable business agenda in companies which are not considered as sustainability achievers or “green” by the current standards. Such an approach would move the needle much further since more companies would be urged by their owners to implement measurable sustainable goals.
Don’t get me wrong, I don’t want to give asset managers a “carte blanche” to proceed like they did in the past. This means, from my point of view, that asset managers who want to follow this route would need to report all of their engagement activities and the respective outcomes. This would ensure that their investors can evaluate if they are doing the right things and, therefore, are enabled to react respectively if the asset manager does not meet their targets.
Legal Disclaimer
Republication or redistribution of LSE Group content is prohibited without our prior written consent.
The content of this publication is for informational purposes only and has no legal effect, does not form part of any contract, does not, and does not seek to constitute advice of any nature and no reliance should be placed upon statements contained herein. Whilst reasonable efforts have been taken to ensure that the contents of this publication are accurate and reliable, LSE Group does not guarantee that this document is free from errors or omissions; therefore, you may not rely upon the content of this document under any circumstances and you should seek your own independent legal, investment, tax and other advice. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon.
Copyright © 2023 London Stock Exchange Group. All rights reserved.
The content of this publication is provided by London Stock Exchange Group plc, its applicable group undertakings and/or its affiliates or licensors (the “LSE Group” or “We”) exclusively.
Neither We nor our affiliates guarantee the accuracy of or endorse the views or opinions given by any third party content provider, advertiser, sponsor or other user. We may link to, reference, or promote websites, applications and/or services from third parties. You agree that We are not responsible for, and do not control such non-LSE Group websites, applications or services.
The content of this publication is for informational purposes only. All information and data contained in this publication is obtained by LSE Group from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data are provided "as is" without warranty of any kind. You understand and agree that this publication does not, and does not seek to, constitute advice of any nature. You may not rely upon the content of this document under any circumstances and should seek your own independent legal, tax or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon. You expressly agree that your use of the publication and its content is at your sole risk.
To the fullest extent permitted by applicable law, LSE Group, expressly disclaims any representation or warranties, express or implied, including, without limitation, any representations or warranties of performance, merchantability, fitness for a particular purpose, accuracy, completeness, reliability and non-infringement. LSE Group, its subsidiaries, its affiliates and their respective shareholders, directors, officers employees, agents, advertisers, content providers and licensors (collectively referred to as the “LSE Group Parties”) disclaim all responsibility for any loss, liability or damage of any kind resulting from or related to access, use or the unavailability of the publication (or any part of it); and none of the LSE Group Parties will be liable (jointly or severally) to you for any direct, indirect, consequential, special, incidental, punitive or exemplary damages, howsoever arising, even if any member of the LSE Group Parties are advised in advance of the possibility of such damages or could have foreseen any such damages arising or resulting from the use of, or inability to use, the information contained in the publication. For the avoidance of doubt, the LSE Group Parties shall have no liability for any losses, claims, demands, actions, proceedings, damages, costs or expenses arising out of, or in any way connected with, the information contained in this document.
LSE Group is the owner of various intellectual property rights ("IPR”), including but not limited to, numerous trademarks that are used to identify, advertise, and promote LSE Group products, services and activities. Nothing contained herein should be construed as granting any licence or right to use any of the trademarks or any other LSE Group IPR for any purpose whatsoever without the written permission or applicable licence terms.
