James Rasteh is the founder and CIO of Coast Capital Management.
I grew up in France, where the French Declaration of Human Rights – liberty, fraternity and equality – was central to our value system and seemed guaranteed for all. My parents subsequently moved to Western Canada, where I became an activist youth. I often found myself protesting against the destruction of natural habitats like the Carmanah Valley in B.C., which seemed under a perpetual threat of being clear-cut.
Eventually, I joined the New York boards of organizations such as Human Rights Watch and Pachamama, which respectively protect human rights around the globe, and prevent the destruction of the Amazon in Peru and Ecuador.
By the time I was appointed to head up international investments at a well-known activist hedge fund, I was engaging with the boards of companies such as Petrobras to stop the building of unnecessary and environmentally disastrous pipelines across the Amazon. I was continually and endlessly disappointed that other investors did not seem to care.
So the rise of the environmental, social and corporate governance (ESG) investment industry was of great interest to me. It seemed that the community had finally developed conscience and conviction by factoring in sustainability and societal impact when deciding what to invest in. And at a time of extraordinary political dissent, marginalization of minorities and willful ignorance of facts – notably on the topic of climate change – one could find solace in institutional investors’ new-found embrace of ESG.
Yet over time, I’ve come to realize that the ESG investment industry is by and large little more than a marketing mechanism, and will not lead to productive change. Rather than follow ESG investment parameters and ignore “dirty” companies (the products of which society needs), investors who actually care about a greener and more just world and who actually want productive change must instead pursue an active investment approach, investing in and putting pressure on the boards of such companies to pursue more sustainable practices.
In 2015-16, for instance, I noticed that one of the largest positions held by Generation Investment Management – co-founded by former U.S. vice-president Al Gore and Goldman Sachs’s Asset Management head David Blood – was in Facebook. This is a company whose business is to collect every possible byte of their users’ data and resell the information to the highest bidder, regardless of the privacy violations that crop up along the way, which is a systematic (though legal?) violation of their users’ privacy.
Facebook has also amplified misinformation with so much success as to nearly unsettle the very foundations of democracy around the world. The fact that Mr. Gore’s asset-management company decided that this was the best ESG investment they could find was an inconvenient revelation.
But Generation is not the only ineffective player in this industry. Most funds are. Currently, ESG funds must pledge the UN Principles for Responsible Investing and follow certain “green” investment guidelines – which means they eschew any “dirty” company of industry. This makes no sense.
First of all, the United Nations’ PRI agency at times feels like a revenue-generation unit for that august yet defunct organization. Secondly, once a fund has procured its credentials from the UN, it must follow arbitrary investment guidelines based on inconsistent and often unavailable data. Thirdly, the whole process is backward-looking and does not account for changes going forward, such as expected future changes in business practices.
The greater trouble, however, is that the process is not actually designed to produce positive change. Most companies that actually focus on environmental, social and governance concerns are adaptive, and led by principled leaders. The flight of capital toward these companies, and away from poorly managed ones, does nothing to improve the ESG parameters of the companies most likely to pursue destructive environmental or social practices. In fact, it does quite the opposite.
Investors would be better at achieving their goals by allocating capital to large and established companies where they can effect improvements in governance, environmental and social practices.
Mining, for example, is seen as a “dirty” industry, but one whose products are basic necessities for a prosperous society. Too often, ESG-focused investors lazily shun the sector. Without the oversight of such investors, these extractive industries are free to continue their environmentally poor practices, especially since industrial companies are notoriously loath to adopt new processes and technologies.
At Coast Capital, we are working to reverse this trend. We work with some of the world’s leading sustainability experts, geologists and mine engineers to identify key technologies that decrease mining pollution. Some of these dramatically decrease the arsenic, sulphate, manganese and heavy-metals pollution of effluent water by a factor of up to 1,000. This constitutes an extraordinary advance in the mining process.
As investors, we are uniquely well placed to ensure a speedy adoption of cleaner mining practices and technologies. We nearly always push for improvements in governance as well.
Thomas Edison once remarked that no one recognizes opportunity because it goes around dressed like hard work. And so it goes for most ESG funds. The collective mantra of ignoring offenders with a passive investment strategy is useless and uninspired.
Investors must work much harder to actually understand the operations of their invested companies, and devise suitable paths to make these more sustainable. Failing that, ESG funds will remain a marketing ploy at best.
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