So what is ESG?
Well if you're anything like me, an acronym makes you flinch.
It stands for Environmental Social and Governance metrics.
And you may hear that and think, well, it means do gooding.
You might also think that actually it
reeks of hypocrisy, given that many financiers
and companies are tossing it around these days.
However, there's something really important to consider,
which is today, ESG is as much about risk management
as it is actually about social activism
or trying to change the world.
What many companies and investors have realised is that
if they ignore what people used to call "externalities,"
other words, a company's environmental footprint,
its impact on a community, what's happening in its supply
chain, what's happening in terms of social issues like
diversity, inequality.
If companies and investors ignore those issues,
it has a nasty habit of coming back to bite them.
What do we want?
Justice!
Just think about #MeToo and what happened there.
Before that scandal exploded - or rather that movement
exploded online - most boardrooms
assumed that sexual scandals, gender issues,
were something that they didn't really
need to worry about as a corporate governance matter.
But after #MeToo exploded, they suddenly realised that
the power of the crowd coalescing suddenly could shake
the entire board.
Just consider for a moment the turnaround
in fortunes of the fossil fuel sector.
If you dial back half a century, the oil and gas sector
in America was actually the largest single component
of the S&P 500.
But then it began to shrink in terms
of its relative footprint.
A decade ago, fossil fuel companies
were still incredibly powerful and strong, and so much so
that most of them assumed they could brush aside
the complaints and protests of environmentalists.
But in the last year, as the ESG sector
has swelled in power and might and confidence,
not only have the share prices of the big fossil fuel
companies fallen by half, but they're
beginning to be forced to think about doing things
like mergers.
They're beginning to being forced
to actually make pledges to cut back on their activities
and to embrace renewables, and to show the world that they
actually can be green.
This is our historic moment.
There are many reasons why the arrival of President Joe Biden
has been a dramatic change in style and policy and tone,
compared to the presidency of Donald Trump.
But one area where the contrast is particularly strong,
is in the area of ESG, and particularly
the environmental issues.
We desperately need a unified national response
to the climate crisis.
As soon as he arrived, President Biden
rejoined the Paris Climate Change Accord.
He pledged that he was going to try and clamp down
on the fossil fuel sector and bring
in much tougher environmental standards.
All of that shows that America really
is starting to embrace many of the environmental policies
that so many have been asking for such a long time.
But the really big question is, what happens next?
Because in addition to debates around shale or fossil fuel
or carbon, there's a whole set of potentially very important
changes happening in terms of the investing landscape, which
may or may not create a flood of money moving into ESG
products going forward.
Right now, it's actually surprisingly hard for investors
in America to invest in ESG-friendly assets
because the idea of fiduciary duty that's
been upheld in the Washington agencies
essentially says that fiduciaries,
i.e. fund managers, can only chase financial returns.
But if the Biden administration loosens those rules a bit,
you could see a whole flood of money moving into ESG
because suddenly pension funds and even retail investors
will want to actually purchase instruments
that can invest in ESG because they feel that it's easier.