ESG experts warn of fundamental problem with trillions in investments

Amid the widespread confusion about standards and high barriers to entry for impact investing managers, some of the strongest advocates of ESG metrics are also among the biggest critics.

With more than $17 trillion in sustainable investing assets in the U.S. and $35 trillion in global AUM flowing into an array of new and growing products based on principles from across the political spectrum, others see more signs that wealth and asset managers can coalesce around a shared vision in 2022 and beyond.

To Gillian Marcelle, the managing member of an advisory firm called Resilience Capital Ventures that connects fund sponsors and development projects with capital sources, the sheer scale of inequality in global wealth and power nullifies the possibility of universal collaboration. Speaking earlier this month at a virtual event held by the nonprofit research organization The Croatan Institute, Marcelle mentioned the fact that some people viewed cream cheese shortages as an urgent supply chain problem this year and that Americans and Europeans spend tens or even hundreds of billions of dollars on pets and ice cream.

“Unless we are specific and we are actually speaking to where are you actually trying to define the crisis, then invoking this universal ‘we’ or attempting to say that we are all in this together will never get us to the point where we are being specific enough to come up with solutions,” Marcelle said. “If you are the [billionaires] who actually increased their financial wealth during the pandemic, then you have a very different experience of what a public health crisis actually involves and therefore what the response should be.”

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The moderator, Croatan Institute Senior Fellow Bill Harrington, had asked the panelists to answer the question of whether the world is facing an emergency right now and, if so, why many people in the wealth and asset management industries aren’t acting with that degree of urgency. The panelists answered with an unequivocal “yes,” and they blamed the ESG movement in part for encouraging so-called sustainable investing that doesn’t change the status quo.

“We are still trying to respond within a particular comfort zone, a zone where we are designing financial innovations, we are designing standards, things to make us comfortable,” said Chantal Naidoo, a doctoral researcher and guest lecturer in climate finance at the University of Sussex Science Policy Research Unit. “Some of us are in rafts on a rocky ocean and others are in a wonderful 40-foot yacht, but the ocean is choppy. And that's true for all of us, regardless of the kind of vehicle that you're traveling on.”

For Daniel Cash, a Fulbright Scholar at the NYU Stern School of Business, capitalism itself is preventing more significant action. As a concept, ESG criteria won’t make “an impact on the real needs” in areas like climate change beyond “a lot of pandering to the corporate world,” said Cash, citing reports on the number of financial firm lobbyists at the COP26 conference in Glasgow in November.

“They know it's now time. They need to set it on their own agenda,” Cash said. “I find it very difficult to come up with a silver-bullet answer because if we stick to an understanding that it is a capitalist system and that's how the hierarchy of power sits, my question is to the rest of the panel and to anybody on the call is, how do you change that dynamic, where it is not in the [corporation’s] best interest, but it's in the global population's best interest.”

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Still, others see paths forward that won’t uproot capitalism. Despite the discomfort with upsetting the current system and the magnitude of the problems with respect to climate change, social justice and health, investing with a larger impact in mind carries great potential, Harrington said.

“Is finance supposed to be addressing emergencies? Is that what sustainable or ESG finance is supposed to be?” Harrington said. “We're all talking about how to get systems to change, which is getting people to change. … Although we're in different places, we are part of human systems and are there ways of thinking of how we change a human system?”

The giants of the finance world don’t have the capacity to do so, the panelists said. Later in the session, Marcelle identified smaller and more local nonprofit and for-profit companies that are “removing the blinders and doing the work of actually mobilizing capital” toward, say, improving “financial and entrepreneurial ecosystems in the developing world” as one possible solution.

“If you want to have five different types of disclosure standards and an alphabet soup of institutions and standards, do not then parachute that into a nascent capital market and expect that it will work,” she said. “And then even worse, then say that you can't find any investible deals or you don't know how to invest in infrastructure in Africa. How would you know? You don't know. You are not familiar with the context and public funds have not been expended on building up the ecosystem.”