Davide Ventrone | CUPE 4600 member

Fighting climate change is going to require a massive reorientation of investment toward low-carbon energy alternatives at a scale, intensity and speed never seen before. Despite this, governments and private actors continue to rely on market-based “solutions” to achieve this reorientation, through popular financial frameworks such as ESG.

ESG, or Environmental, Social, and Governance factors, are the latest craze in sustainable or “responsible” investing. ESG may seem like an easy solution, but in reality, it presents a potentially dangerous illusion. Rather than restructuring economies, it continues us on a path of climate crisis.

Real solutions to the climate crisis must be spearheaded by public ownership and democratic decision-making that is for people and not profits. Universally funded public services, affordable access to renewable energy, housing, food, and green jobs must all be part of a green and just transition. Corporate profits should not guide our investments, but our future should. Understanding the ESG phenomenon is important to show its potential dangers, why it fails and what the alternatives are to achieving a successful, green and sustainable future.

The origins of ESG

Over the past decade, ESG has become the dominant socially responsible investment framework in the world of finance. It first appeared in a 2004 United Nations report titled Who Cares Wins: Connecting Financial Markets to a Changing World. In this report, the UN Secretary-General called for a joint initiative of financial institutions to “develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management”.

While earlier practices focused on excluding companies due to environmental, social or governance concerns, ESG has started to focus more on the positive contributions of companies. Thus, the central premise of ESG became that you can do well financially by doing good ethically with your investments.

So, what exactly is ESG and how does it claim to achieve this? ESG is a framework that sees specialized institutions rate organizations —mainly corporations — and assign them a score based on criteria such as carbon emissions, labour practices and so-called “corporate governance”. By assigning scores to organizations that are rated based on environmental, social and governance factors, investors can access information on the potential impacts of a company’s operations.

According to the ESG approach, poor performance in one of the areas of ESG is an indicator of investment risk. This risk analysis allows for a particular assessment of various stocks, bonds, and other securities that allows for the creation of a supposedly “green” asset class. Thus, by paying attention to ESG scores, investors can in theory not only avoid certain risks, but also have a positive social and environmental impact with their investments.

Almost all major Canadian pension funds have expressed support for ESG, including the Ontario Municipal Employees Retirement System (OMERS), the Ontario Teachers’ Pension Plan (OTPP), the Caisse de dépôt et placement du Québec (CDPQ), the Alberta Teachers’ Retirement Fund (ATRF), and the Canada Pension Plan (CPP).

It is not an exaggeration to say that ESG has exploded in recent years. A 2022 study showed that 89% of global investors have adopted ESG models. In the U.S., ESG-related assets held by managers account for around $18.4 trillion and are projected to grow to $33.9 trillion by 2026. In Canada, a 2023 survey estimated that 94% of asset managers are using ESG as a responsible investment strategy, now accounting for $3 trillion in assets. Globally an estimated $53 trillion in assets — over one third of global assets — are expected to be held in ESG funds by 2025.

The failings of ESG and market solutions to green investment

Why then is ESG so potentially dangerous as a model to resolve climate change? The first problem is that it is fundamentally about mitigating the potential impact of climate crises on financial profits rather than the impact of financial investment on the climate. The model seeks to mitigate first and foremost the risk that climate crises would have on future financial returns.

The same 2022 survey of Canadian investment stated that the top reasons to consider ESG were improved returns (65%) and risk mitigation (43%), with social or environmental impact near the bottom (20%). Tariq Fancy, the former head of Sustainability at BlackRock which is the world’s largest asset manager, became a staunch critic of the model after leaving his position in 2021. He argued that protecting portfolios against the risk of climate change is not the same as stopping climate change from occurring. The key question on ESG, Fancy says, is whether we are doing this to make the world a better place or to improve investor returns.

Since the data and indexes are provided by a plethora of different firms, and there is no widely agreed system that organizes or defines what the E, S and G entail, there is no standard for ratings at all. It is estimated that over 100 organizations are collecting ESG data, over 500 are producing ESG rankings, and there are 170 ESG indexes, 100+ ESG awards, and 120 voluntary ESG standards. This creates a basic definitional problem in which the core elements of ESG remain ill-defined. In fact, studies have shown quite clearly that there is no correlation between the ratings of different agencies.

In practice, ESG portfolios are often not very “socially responsible” at all. The “greenest” ESG funds tend to be weighted mostly in tech companies, and that requires ignoring the horrible labour rights record of companies such as Tesla and Apple. Many CUPE members would be very surprised to find out their employers have very positive ESG scores regarding labour relations. This is likely because unions are not a primary point of contact for assessments of a firm’s labour history.

When it comes to climate justice the results are equally problematic. For example, among 33 explicitly climate-themed funds in the U.K., one in three funds were invested in oil and gas companies that had stakes in Exxon. BlackRock still has 1.26 billion or 6.71% of its assets in fossil fuels. Furthermore, a recent study found that even when publicly listed companies divest from fossil fuel based companies, private equity firms are filling the gap. The 10 largest private equity firms have 80% of their investment portfolios in fossil fuels.

This reality led Tariq Fancy to argue that ESG policies are not only useless, but that BlackRock is in fact “leading the world into a dangerous mirage”. Fancy specifically came out against ESG after conducting a study at Toronto Metropolitan University which showed that the model misleads people into thinking that serious actions were being done to mitigate climate change and that this could actually delay governments from taking necessary regulatory action.

Private control of a public future is not the way forward

The failures of market-led green financing contributed to an important shift in the conversation from state regulators and financiers between the COP26 and COP27 climate conferences. Despite this, actors from the financial sector continue to argue that investment flows should fundamentally be decided by financiers. Larry Fink, the CEO of BlackRock and key player behind a number of ESG, drove the delivery of this message. Again, this shows that private profits, rather than positive public outcomes, are the main goals of these models. As Fink and others resist regulatory policies in the European Union that discipline financing of carbon-heavy activities, it becomes clear that in practice these market-based initiatives retain and even expand control of investment in private hands. So, is ESG really what our pension plans should focus on to fight for social justice, champion greener jobs, stop privatization and save the planet?

ESG’s purpose is first and foremost about assuring that corporations are protected against the risk that social issues could potentially pose on their revenues. The social issues themselves are of secondary concern and their resolution is not the main focus of ESG. ESG has little ability to resolve social issues as this is simply not its purpose in the first place. And the ability of pension funds to effect change is very limited as the real power is held by large asset managers.

A real solution to the social and climate crises we now face will require direct regulatory action to cut emissions, guide investments towards desired ends, and impose penalties for those who do not comply. Strikes, protests, occupations of critical infrastructure, or lobbying are all options that will actually move us forward by changing the balance of power in society at large. Only through mass action, and publicly-led policies which are determined democratically can we even hope to achieve these goals. ESG with its vague criteria, focus on economic risk, poor record, and lack of democratic engagement simply cannot achieve this.

About Davide Ventrone

Davide Ventrone is a graduate student pursuing a master’s degree at the Institute of Political Economy at Carleton University and was a placement researcher at CUPE. His master’s research is focused on the financialization of public infrastructure and is supported by the Social Science and Humanities Research Council.

A CUPE 4600 member of Unit 1 (Teaching Assistants), Davide is currently VP External, he is working to connect the local union with other like-minded groups in the Carleton and Ottawa communities.