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Macroscope
OpinionComment
Anthony Rowley
Anthony Rowley

Macroscope | The real danger of the ESG investment boom is not a stock bubble

  • What really matters is not the ‘greenness’ of ESG stocks or green bonds but how these distract from the critical issue of countering climate disaster
  • A more officially coordinated and institutional approach is needed rather than corporate and financial sector ‘do-gooding’

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An air tanker drops retardant along a ridge during a fire in Lakehead, California on July 2. As extreme weather events mount, ESG investment is a very indirect and almost certainly ineffective way of funding climate action. Photo: AFP
Anthony Rowley
The former head of Japan’s (and the world’s) biggest pension fund cautioned recently that he sees signs of a stock bubble developing – not in the rich valuations of Wall Street tech stocks, where such warnings are common, but in that holy of holies for climate activists: so-called ESG stocks of companies with good environmental, social and corporate governance.

This seemed like sacrilege given the reverence for “green” investing, but Eiji Hirano, former chairman of Japan’s Government Pension Investment Fund, is not alone in questioning the cult of ESG investing.

It is right to do so because ESG investing may be not only a bubble but a pretty and butterfly-like distraction floating above the grim landscape of climate change, which is going to require much more interventionist financial and other action if an existential disaster is to be averted.

Estimates of how big the ESG market is vary hugely according to definition, but there is no denying that it has reached trillions of dollars. As such, ESG investing has become a major factor influencing how public savings flow into climate and other socioeconomic investments.

One reason that few challenge the ESG orthodoxy is that, as one Wall Street practitioner noted to me, the whole issue of sustainable investment (of which ESG forms the dominant part) is rather “fuzzy”. It is difficult to challenge that which you do not understand.

ESG is more or less whatever you want it to be, or rather, whatever asset managers want to project it as being. They, of course, have a vested interest in extolling its virtues because of the rich source of commission income that ESG investments represent, as veteran Japan securities analyst Jesper Koll notes.

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