Companies cannot afford to ignore society’s demand for ESG

This change in mood has impacted some of the most well-known companies in UK finance. Barclays bank has faced protests centred on its retail branch network. This has been justified by its supposed links to defence companies that work with Israel.  Meanwhile pressure by Fossil Free Books has forced the Edinburgh-based institutional investor, Baillie Gifford, to end sponsorship deals with several literary festivals. Complete divestment from the fossil fuel industry is central to protesters’ demands.

These two flashpoints are part of a long-running tug of war between absolutism and nuance in Environmental, Social and Governance (ESG) driven investing. As we noted in these pages back in 2021 - even before the Ukraine and Gaza wars, and high inflation forced perspectives to shift - embedding ESG principles into the approach of how firms operate is a more sensible aim than blunt divestment. Orwellian absolutism has a poor track record of translating into good policymaking. But this view is far from universal.

On the one hand pressure groups argue that only disruptive protest will focus minds, and channel money. Active divestment of investments in oil, gas, coal, and defence companies - regardless of the operations of the underlying firm - has been a central demand from these groups. On the other hand, such wide-ranging definitions can quickly trip over themselves. Not least on social media platforms. As Barclays CEO, C. S. Venkatakrishnan noted the recent Times CEO Summit, “There is very little respect for facts in social media. It is as if what is asserted and repeated is the truth. There is an assertion that we [Barclays] are investors in defence companies. We don't invest in defence companies”. How do investors navigate this tumult, and the range of conflicting views? And are there areas of the economy where sustainability and ethics are less politically charged, but no less important?

The first thing to note is that not all sustainable and ethical investing issues are as contentious as fossil fuels and defence capability. Sustainable and ethical delineations can - and should - be applied with dexterity across the economy. From consumer goods to healthcare, from leisure operators to technology providers the same issues apply. Progress in delivering a sustainable economy and healthy allocation of investment will require change outside the obviously controversial areas. Often these more consumer-driven operators are where the biggest impacts can be achieved. Which consumer brands are bought by consumers determine where trillions of pounds are allocated.  

While the recent focus on economic growth - particularly in stock markets - has been in the technology sector and artificial intelligence it is the deployment of commodities and raw materials that sits at the heart of a durable economy. In a world of stretched resources we need to be finding solutions that grow our economy, but not at the expense of future generations. At present markets are failing to do this. Earth Overshoot Day marks the date each year when demand for ecological resources exceeds what Earth can sustainably regenerate. This year that date is in just a month’s time: 1 August. This means over the course of 2024 we will consume 70% more resources than needed to leave the planet in the same condition for future generations. This is clearly not sustainable, and certainly not ethical.

So what sort of UK companies offer another path, and what market-based solutions can accelerate Earth Overshoot Day towards New Year’s Eve? Octopus Energy is one of the big recent success stories addressing energy efficiency and the switch to a less carbon intensive world and is now valued at more than seven billion pounds. It is showing that innovative pricing and understanding consumer incentives, rather than banning stuff, can change behaviour. Its commercial success has been underscored by returning three billion pounds of public money that guaranteed the bail out of Bulb Energy. Octopus remains in private hands and the reality is that public markets have few pure play green companies. But the UK is a world leader in private companies with the potential to disrupt legacy operators with more sustainable solutions. Cheeky Panda - in using bamboo for hygiene products. Faith in Nature – in developing sustainable beauty and care products, Clipper – as makers of fairtrade tea. As consumers increasingly demand change markets need to show that capital will flow to these types of companies to accelerate the transition to more sustainable consumption. Else we will see further red and orange paint. More cancelled arts festivals.

With a General Election later this week ESG investing is an area that will appear in ministerial in-trays sooner rather than later. Trying to influence debate last month was the UK’s Legatum Institute with their report entitled “Woke Capitalism in Britain”. It concluded that “ESG regulations and practices have made the British businesses less competitive. This is not good for business, nor is it good for the economy.” Whilst no-one would pretend that the Legatum Institute are politically impartial it is symptomatic of how recent low economic growth can weaponise these issues in Westminster, with echoes in the City. Jim Ratcliffe, CEO of chemical giant Ineos, has accused the Labour Party of plans to “tax North Sea Oil and Gas out of existence” and plans to decarbonise the UK’s grid by 2030 as “absurd”.

Conservative ministers have recently shown themselves amenable to the changing economic and political backdrops recently noting late last year that “Investing in defence companies is a good thing – for our values, for investors and for society.”. It would be naïve for the Labour leadership to think they won’t be forced to make similarly tricky judgements – all in the face of activist pressure - should they seize power. The best advert for financial markets is to offer a helping hand.

Published on The Times: 01/07/2024