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What to Make of ESG?

Criticism mounts as well-intentioned ESG investors and companies face pushback from volatile markets, hostile politicians, questionable investments and accusations of greenwashing.

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Published Jan 13, 2023 5:00 PM by Jack O'Connell

(Article originally published in Nov/Dec 2022 edition.)

A recent Barron’s cover story featured a company called Tricolor and hailed it as a favorite of ESG investors. A “buy here, pay here” used car dealer catering to underserved communities in Texas and California, Tricolor was a shining example of a socially conscious firm that met the needs of those – in this case, mostly poor Hispanic immigrants – otherwise unable to buy a car by both selling them one and financing it for them.

It attracted investments from the likes of BlackRock, J.P. Morgan, Barclay’s and Pimco and held coveted CDFI status – certification from the U.S. Department of the Treasury that it met the standards for a Community Development Financial Institution and was therefore suitable for investment by ESG-oriented banks and investors. Its debt offerings were further certified by S&P Global Ratings as meeting the requirements of so-called “social bonds,” making them attractive to ESG funds and enabling the company to grow rapidly.

But as the Barron’s investigation found, it wasn’t all wine and roses at Tricolor. The article, titled “A Blind Spot for ESG Investors,” detailed numerous examples of “pricey cars, registration delays, and customer complaints.” Daniel Chu, founder & CEO of Tricolor and himself the son of Chinese immigrants, nonetheless vigorously defended his company’s activities. “We’re going to make mistakes,” he explained, “but I think it would be really, really misleading to suggest that we don’t actually execute a mission or a purpose with the business.”

And that, in a nutshell, summarizes one of the biggest challenges of ESG investing. What companies do you invest in? What criteria do you use in the selection process? How do you know they are what they say they are? It can get complicated. It’s not a perfect process. Mistakes will be made. But ESG investing is here to stay.

“Do Well by Doing Good”

It was all so simple in the beginning. “Do well by doing good” – that was the idea, and it seemed easy enough to achieve. Invest in those companies that fight racism, sexism, prejudice and discrimination in all its shapes and forms and that make the world greener, healthier, safer, more affordable and more equitable. And get that warm, cozy feeling of not only doing some good in the world but profiting from it at the same time.

You can have your cake and eat it too – or can you?

“Environment,” “social” and “governance” – those three magic words – cover a lot of ground. Most of the emphasis these days seems to be on the “environment” side – climate change, global warming, air and water pollution. But there’s plenty of room left over for “social” issues like economic inequality, racial discrimination, employment opportunity and – in the case of Tricolor – access to credit. Maersk, the shining star of ESG in the maritime world, is currently investigating charges of widespread sexual harassment onboard its ships and has already fired a number of employees.

“Governance” gets the least attention since it has to do with more boring topics like shareholder rights and proxy fights – about which most investors could care less. Nonetheless, the sudden collapse of cryptocurrency exchange FTX amid accusations of massive mismanagement and a stunning lack of adequate accounting controls is a stark reminder of just how important governance issues can be.

For many companies, including those in shipping, it’s not enough anymore to just make great products, deliver the goods and earn a profit. Companies also have a moral obligation to make the world a better place by fighting social injustice, helping the underprivileged and greening the planet. They talk about how they do all these things in annual “sustainability reports,” which have become increasingly fashionable and, for some investors, more important than their SEC-mandated annual reports.

Will you get a better return by investing in these companies? The jury’s still out on that – despite the widespread belief that investing in ESG companies actually produces higher returns, at least over the longer term as the world transitions to renewable energy. The data is inconclusive, but you’ll still have the satisfaction of knowing you’re investing in a good cause and making the world a better place.

Where to Invest?

But which companies should you invest in? That’s the catch. Certainly a company like Siemens Gamesa, featured in this edition, qualifies. It makes offshore wind turbines, a growing source of renewable energy. Who could argue with that?

You’d be surprised. There are lots of people who oppose offshore wind. They don’t want to look at windmills on the horizon. Visual pollution, they call it. They don’t want the massive cables that transmit offshore power to land-based facilities coming ashore in their communities. They fear for migrant birds who might get caught up in the massive blades. They fear for the right whale and other marine species who might be affected by “noise pollution.”

If you can’t agree on something like offshore wind, a leading form of renewable energy, what can you agree on when it comes to ESG? Even state governments are getting in on the act.

Texas, a huge fossil fuel state, has lots of onshore wind as well, thanks to the foresightedness of a former governor named George Bush. But it’s warning investment firms that boycott oil and gas companies that they may be excluded from managing the state’s massive pension funds. Other “red” states like Florida are threatening the same thing, and some – like Louisiana and West Virginia – have already withdrawn funds from BlackRock, the leading exemplar of ESG investing and so-called “woke capitalism,” though Chairman & CEO Larry Fink denies the “woke” charge, calling his firm’s investment approach “stakeholder capitalism” instead.

On the other hand, there are “blue” states like Maine, Illinois, New York and California that are actively selling off their fossil fuel investments and putting the money into renewable energy. According to a recent report in Bloomberg Green Daily, the Chicago Teachers Pension Fund plans to “sell all $350 million of its fossil fuel holdings by the end of 2027, or invest enough in clean energy to fully offset its stakes in oil, gas and coal.”

But don’t worry. There are plenty of banks and investment firms around that will tell you exactly what to buy if you’re interested in ESG investing. Most offer ETFs or mutual funds geared to ESG standards, though the standards themselves may be a bit hazy. And there are plenty of maritime-oriented ESG funds as well. More on that later.

Perspective

My esteemed colleague, Allen Brooks, opined recently on ESG investing in his fortnightly Energy Musings newsletter. Allen has a way with words, and he titled the article “Is ESG a Religion, a Helpful Guide or Just a Scam?”

The article includes a number of interesting facts. The term “ESG,” he explains, was coined in 2004 by someone named Paul Cummings-Hunt, who at the time headed the U.N.’s Environment Programme Finance Initiative. He notes that 2022 saw the first net outflow of funds from ESG funds in history as the bull market of the last two years collapsed and energy stocks soared – “making do-good investing more of a sacrifice,” to quote the Australia Straits Times, and raising the question of whether these funds only do well in up markets.

Allen also points to the high fees charged by ESG managers and argues that their huge profitability has been an important driver of their marketing success. Banks make more, but it costs you, the investor, more to do well by doing good. For many investors, that doesn’t matter. They’re willing to pay up and put their money where their beliefs are.

On the frequent charge of “greenwashing” – using the ESG label as a cover for investments that are not really environment, social or governance-oriented – Allen has this to say: “With few standards for what constitutes an ESG stock or bond, some analysts allege that large banks and asset managers are ‘greenwashing’ by using new investment products to boost their bottom lines in the name of ‘doing good for the world’ while essentially not accomplishing anything positive.”

Reserving Judgment

On the question of whether ESG is a religion, helpful guide or just a scam, Allen reserves judgment, and so shall we – although “helpful guide” seems to come closest. He does, however, object to the term’s “weaponizing” by politicians and others and calls for a truce: “The rush to do something about ESG is wrong – at least until we have clearly defined terms, accurate measurements, and tools to address the issue.” That will come with further discussion, says Allen, and “such a discussion is needed to diffuse the political war over ESG.” Couldn’t agree more.

Meanwhile, maritime investors can take comfort in the fact that there are plenty of useful guides and proven investment vehicles available to them. Webber Research, for example, founded by former Wells Fargo maritime analyst Mike Webber, publishes an annual ESG Scorecard, ranking publicly traded shipping companies on a variety of ESG factors including their carbon disclosure protocols.

In addition, the preamble to the report explains, “We believe there is no longer a place in the public shipping markets for companies that do not prioritize strong corporate governance and capital stewardship. We believe that risk premiums associated with poor governance and capital discipline should continue to widen, eventually pricing-out conflicted players and antiquated structures from public markets.” Wow, strong medicine. 

Among the highly ranked companies are Genco Shipping & Trading (GNK), Eagle Bulk (EGLE), Matson (MATX) and – one of my long-time favorites – Kirby (KEX).

And for those of you wishing to delve more deeply into the subject, the North American Marine Environmental Protection Association (NAMEPA) offers an online “Workshop for Corporate Maritime Sustainability,” the only one of its kind to date. Learn more at www.namepa.net. Meanwhile, happy investing and happy holidays to all! 

Jack O'Connell is the magazine's Senior Editor.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.