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Without a Ref it’s Easy to Game an ESG Contest

Without a universally recognised regulator to define what makes a strong environmental, social and governance (ESG) performer, gaming the system for a top score comes down to how much cash is on hand to power the PR machine, according to an investment firm CIO.

Alvia Asset Partners CIO Josh Derrington said without a recognised arbiter, it was easy for entities’ spruiked claims of being pro-ESG to go unchecked, or worse, for a savvy PR to get a preferred narrative adopted by the media.

“The biggest issue with ESG recognition is that any determination is still so subjective.

“Without a centralised body dictating what qualifies as pro-ESG, the market is being dictated to by the whimsy of well-fed PR machines determined to ‘greenwash’ some market players at the expense of others, who can do little more than watch their market value plummet,” he said.

Derrington likened it to a sporting fixture, where the winner was not chosen by an appointed referee, but by whichever player had the greater ability to influence the crowd.

“Until some form of standardisation is widely accepted to measure ESG performance, the system is ripe for abuse.

“I’ve seen investment firms that tout a strong ESG-focus, when the main objective is simply to use it as a ‘lever’ to raise capital.

“It’s being used more as a way of pulling money in, than doing right by the globe – particularly when good ESG practices would already be embedded in a prudent company’s processes as a way of managing long-tail risks,” he said.

Unfortunately, the way the market is skewed towards ESG considerations means that lots of assets have been left stranded, according to Derrington.

“We hold investments that if subjected to first-order thinking might be considered anti-ESG. For example, we have shares in a rail network that happens to transport some coal. As such, the investment gets thrown in the discount bin because it doesn’t appear ESG-friendly.

“But when you look closer, you discover that the coal the company transports is metallurgical coal, which is necessary for steel production in third-world countries as they urbanise. So, should the investment still be considered anti-ESG?” he asked.

Derrington noted that the focus on ‘ESG-related factors’ was often at the expense of other factors impacting on the fundamentals of that business, which he said was not in anyone’s interests – least of all the business itself.

“From my perspective, it’s essential to incorporate strong ESG practices, since the investment is unlikely to survive without them. However, these practices should be considered as part of standard operating procedure, not as a way to appease a marketing platform or tick off a checklist,” he said.

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