ESG: The “green” joke with “sustainable” investments
The abbreviation ESG has fallen into disrepute in the financial world. While the initials for “environmental”, “social” and “governance” stood for sustainable and green future investments for a long time, the image of ESG has suffered greatly in recent weeks. Because if ESG is written on equity funds, then investors often get so-called “mixed bags” – stocks from companies that are actually not green and sustainable at all.
The most recent case is the scandal surrounding DWS, Deutsche Bank’s fund subsidiary. The offices were raided by the authorities last week in search of evidence of the greenwashing allegations. CEO Asoka Woehrmann has already had to resign. The accusation against DWS is that sustainable declared investment vehicles are not so sustainable.
“After the examination, there were sufficient factual indications that, contrary to the information in the sales prospectuses of DWS funds, ESG factors were actually only taken into account in a minority of the investments,” according to the public prosecutor. Another exciting point: the investigation was triggered by the former sustainability officer at DWS, Desiree Fixler.
Now the question arises whether the abbreviation ESG can still be trusted at all. As a result of the latest developments, more and more people are doubting whether ESG even stands for ecological, social, and ethical standards – or whether these “criteria” are so broad and blurred that they are susceptible to fraudulent labels and greenwashing. A problem of the matter: The ESG criteria, the fulfillment of which rating agencies evaluate, have no standards. But the financial service providers who put together the ESG funds and bundle shares from different companies in ETFs refer to these ESG certificates.
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The “green” company with ski slopes in the desert
And that’s how it happened, for example, that the real estate company Majid Al Futtaim Holding LLC, which builds ski slopes in the Arabian desert, received an ESG risk rating of 19.6 (“low risk”) from the rating agency Sustainalytics. For comparison: The Austrian Verbund AG with a renewable share of 95 percent in electricity has a rating of 18.9, the electric car manufacturer Tesla 28.5 (“medium risk”).
Voices in the financial world are already calling for ESG criteria to be fundamentally revised. Tariq Fancy, former Blackrock manager and well-known ESG critic, calls for the ESG industry to be split into its individual parts. A distinction must be made between “environmental”, “social” and “governance” – because a company that complies with ethical standards is by no means a green company and vice versa.
A brand new documentary by Arte TV also explores the question of what is actually inside ESG-branded funds. The research revealed, for example, that the shares of the Belgian company Umicore appear in sustainable funds. Although Umicore is committed to the recycling of industrial metals, this does not go together with the radioactively contaminated landfills in the French Cevennes and Belgian Flanders. There, residents tell of adjoining properties that have become worthless and of cancer that has killed pets and made residents sick.
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Meanwhile, Umicore’s share price has performed well – although it fell sharply towards the end of 2021, it is up 14% year-to-date. Mind you, in a phase in which large parts of the stock market had to lose a lot of feathers as a result of the US interest rate hike. Delicately, the Umicore share is in a “sustainable” fund of the Zurich bank Globalance – alongside the shares of Tesla, Amazon, Etsy, and Microsoft. And that’s not all, finally, the solar airplane pioneer Bertrand Piccard (he flew around the world in a solar airplane) advertises the fund called “Globalance Zukunftsbewegter Fonds“.
Another example from the documentary: Majid Al Futtaim, the aforementioned real estate company based in Dubai, is also considered a green investment and has star actor Will Smith advertise for it. Majid Al Futtaim is also responsible for the fact that an indoor ski slope in the middle of the Dubai desert operates with enormous energy consumption and has even flown in penguins from Antarctica for tourists. The “green” image and the promise to reduce its own carbon footprint earned the company $1 billion in funding.
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Tesla without ESG, Exxon with ESG
Recently, many, especially Elon Musk himself, were amazed when Tesla was thrown out of the important S&P 500 ESG Index – while the oil giant Exxon was allowed to stay inside. A lack of low-carbon strategy and codes of conduct for the company were cited. Racial discrimination and poor working conditions at the Fremont factory as well as dealing with the US auto safety agency NHTSA, which investigated several deaths in connection with the “Autopilot” driver assistance system, were also criticized.
The example of Tesla also shows that mixing environmental, social and governance criteria is difficult. The company may have problems in the latter two categories, but it should actually do well in terms of the environment (battery electric cars are being promoted by states worldwide because of the chance of CO2 reduction). Musk’s verdict: “ESG is a scam.”