Buzzwords are usually a reliable indicator of investment fashions and concerns.
Covid and omicron will probably top this year’s lexicon but ESG and net-zero won’t be far behind.
True, ESG is an acronym for environmental, social and governance but it has developed into a catch-all phrase for investors’ attitudes towards all things green, sustainable and diverse.
While these ideas have been around for some time, 2021 was when investors started taking them seriously.
So much so that earlier in December, Sir Rupert Soames, the chief executive of outsourcing group Serco, warned the march towards greater social responsibility and governance was even threatening the UK’s national security.
That might sound like CEO hyperbole, but his comments followed a decision by Serco not to bid for contracts with the UK’s Atomic Weapons Establishment due to fears some institutional shareholders might dump its shares as result.
Glasgow meanwhile held the latest global climate change summit in November, with commitments from most delegates to cut their use of fossil fuels and coal, in particular, though China and India were notable foot draggers.
Companies and investment institutions too were keen to brush up and show off their green credentials.
Mining companies were lining up ahead of the Glasgow get together to announce their commitments to net-zero carbon emissions.
All laudable enough given that the need for action on the planet is widely accepted but also at a time when many were paying out huge dividends from the soaring price of coal – currently public enemy number one for climate change activists.
A lot of the programmes also depend on carbon offset schemes, where the benefits remain unproven as yet while the problems of dealing with issues such as tailings dams and pollution from production also remain.
And that is before the elephant in the room of how much of a reduction in profits is acceptable to meet ESG ambitions, especially for investors.
That question has been thrown into sharper relief by the performance of the ethical/ renewables sector relative to more mainstream investments over the past twelve months.
After a bumper year in 2020, when money flowed into ESG-focused funds, things have changed markedly in 2021 even with the commitments by most firms to cut CO2 emissions.
The MSCI Alternative Energy Index fell by 12.6% in 2021 while the oil and gas dominated MSCI World Energy Index soared 43.9% as oil and gas (and coal) prices rocketed.
How do investors react to this? Tariq Fancy, the former head of sustainable investment at Blackrock, gave an intriguing insight into the institutional mindset earlier this year.
In a long and detailed series of essays, he argued that ethical investing has "little to no impact" on the environmental and social causes that companies claim to support.
Indeed, accusing the financial sector of box-ticking and greenwashing he said the current obsession with ESG only made the situation worse by “creating an oasis in the middle of a desert”.
More pertinently, it allows fund manages to charge higher fees for investment products with scant evidence of any real-world impact.
“10% of the market not buying your stock is not the same as 10% of your customers not buying your product.”
But while that might be true, it is also hard to argue that the growing awareness of the need for climate action is having no effect.
Shell’s shock defeat in a legal case in the Netherlands over its net-zero reduction plans was one example, while the removal of three directors from Exxon’s board by activist group Engine No. 1 was another.
Others also think there is a change underway in how investors think especially among the young where there is said to be a much greater awareness of ESG issues and keenness to act on them
Mike McCudden, CEO of investing marketplace CrowdX recently wrote in the Standard
“People understand that what their money does influences society as a whole, and with a rapidly growing range of ways in which to invest at a granular level, investors can pick and choose as they please.”
He added that responsible investing will make eventually funding cheaper for those who look beyond simple profitability and as a result ensure their proposition appeals to the widest range of investors.
And whatever you view of the current ESG bandwagon, that surely has to be a plus.