Untangling ESG
Making sense of the latest trends in property and economics from around the globe
3 minutes to read
ESG
A few years ago ESG became popular in investment circles. It’s rise prompted searching questions as to what companies were for. Was the primary responsibility of a company to maximise value for its shareholders, as Milton Friedman famously said, or was that goal in some way to be balanced with obligations to society?
Big investment managers like Blackrock became central to those questions - at least in part because Blackrock's founder and chief executive Larry Fink wrote what is now considered to be a seminal letter to shareholders in 2018 stating that "to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society."
As the ESG movement gathered momentum, US regulators became concerned that the big funds were no longer putting the interests of shareholders first. The Department of Labor in 2020 sought to enforce a rule ensuring that investment managers could consider ESG factors "only if they present economic risks or opportunities". In other words, consider ESG, but only in the context of its impact on shareholder value.
That proposal never made it through but disagreements continue. Over the past year, more than a dozen US states have introduced rules for state pension funds either pushing them to divest from gun and oil companies, or conversely requiring them to divest from companies that boycott "non-ESG" activities.
Shareholders first
During the intervening years the big investment managers have sought to make it clear that the focus on ESG comes from a duty to shareholders, rather than any moral stance. "We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” Mr Fink said in his 2022 letter to shareholders.
Anyway, this morning a lot of coverage is dedicated to news that Blackrock and Vanguard are among companies that told the UK's Environmental Audit Committee that they would not support a net zero proposal that called for "no new investment... in coal, oil, and gas."
Our "role in the transition is as a fiduciary to our clients – it is not to engineer a specific decarbonization outcome in the real economy," Blackrock said in its response.
What is and what isn’t ESG remains debatable.
Another bad number
UK inflation hit 10.1% in the year to September, equalling a 40-year high set in July. The reading was driven higher by the biggest jump in food prices since 1980, according to official figures out this morning.
"Today's release highlights the danger that underlying inflation remains strong even as the economy weakens," Paul Dales, chief UK economist at Capital Economics tells Reuters. Core inflation, which strips out the volatility of energy and food, hit 6.5%, a 30-year high.
The next interest rate decision from the Bank of England's Monetary Policy Committee is scheduled for November 3rd.
Mortgages
Jeremy Hunt's reversal of many of the tax cuts outlined in the "mini-budget" prompted a rebound in the gilts market that has held relatively firm since the speech on Monday.
Whether or not the resulting decline in yields feeds through to the mortgage market is a key question for the housing market this side of Christmas. NatWest on Tuesday pushed on with an increase in rates and average two and five-year fixed rates edged up to their highest level since 2008, according to Moneyfacts.
“It might be a few weeks or a few months before [a fall] comes through,” Simon Gammon of Knight Frank Finance tells the FT. Thought "we don’t expect a dramatic decline in rates, or seeing them going back to where they were.”
In other news...
‘Green hushing’ on the rise as companies keep climate plans from scrutiny (FT), UK business confidence withers (Reuters), Bellway expects sluggish sales as interest rates rise (Guardian), and finally, British Land weighs £590 million Facebook London office sale (Bloomberg).