ESG was everywhere. Now, 2024, tumbleweed. Was it all just a
meaningless marketing exercise, or has the
way people invest our pensions and our savings,
has that genuinely changed? ESG is the next
evolution of capitalism. When we talk about
ESG, we are talking about the future of humankind. The story of ESG is a
multi-trillion-dollar marketing scheme. It's a story about
hype, ambition. Humanity responding to
a set of inconvenient truths with something
short of real solutions. The ESG hype cycle is over. Those three letters
may even disappear, and we're going to move to a
much, much better place because of it. ESG is trying to think of ways
to invest money in companies, whether they are company
bonds or stocks, in a way that helps the environment
rather than hurts it, in a way that advances social
aims rather than harms them.

in a way that encourages companies to be governed properly, soundly, with lots of checks and balances, and with appropriate controls. So the E is environmental, the S is social, and the G is governance. The term became trendy in the aftermath of the Paris agreements in 2015 to keep global warming well below 2 degrees above pre-industrial levels. There was quickly a realization that the private sector would have to play its part in that. I'm Nicolai Tangen and I'm the CEO of the Norwegian Sovereign Wealth Fund. We run $1.6tn and we own roughly 1.5 per cent of all the listed equities around the world. ESG is very, very important. Climate is a financial risk. Now, we are invested in all the companies across the world. And so if one company pollutes we will pick it up in the rest of the portfolio. If you have a long-term view and you really

care about both the climate
and the financial returns, you have to care
about these things. There was a period,
in the late 2010s, when I couldn't pick up the
phone or open up my email without being bombarded with
people just desperate to talk to me about their
ESG credentials. And now, 2024, tumbleweed. It does not come up in
conversation at all. The excitement around
ESG reached its peak in 2021; the COP26 climate
conference in Glasgow in the UK. There was a big announcement,
the Glasgow Financial Alliance for Net Zero. Most of the biggest
financial institutions in the western world declared
their support for efforts to reach net zero
carbon emission. But there is a big difference
between declaring one's support and actually acting on it. I feel the ESG
hype cycle is over. I think we are at that
point of disillusionment. The ESG party as
we know it is over.

So I would think about the ESG
industry as having produced some good things that we need to
keep, some bad things we don't. ESG is here to
stay, but it's not going to be a linear journey. The question is: who
killed the ESG party? There's a number of suspects. Our first suspect
is Vladimir Putin. One of the really big
moments for the ESG industry was that invasion of Ukraine. Higher hydrocarbon prices just
following the Ukraine invasion. The higher costs of capital with
the increase in interest rates have hurt the performance
of ESG-driven strategies. So if you're an ESG
investor during that period then you are dramatically
underperforming the wider market, which is being
buoyed by oil and gas stocks. Russia's invasion of
Ukraine had the effect of putting more focus on
energy security and safety rather than thinking
about climate. While markets were going
up and everyone was safe,

we could spend all our time
arguing about ESG. As soon as the world got scarier,
add a bit of Covid, plus a bit of geopolitical
tension, war, warheads, invasion, tanks, suddenly,
we all woke up and went, boy, oh, boy, this stuff is
immaterial compared to what's going on in the real world. Surely, it makes sense to
help fund the companies that provide the ammunition that
countries need to defend themselves from hostile actors. And this was one of the things
that made people think, hang on, did these criteria
actually make any sense? People forget that the oil and
gas sector, the energy sector, has underperformed the S&P
500 for the last 10 years. People keep waiting
for the last hurrah. When will it finally make
me more money than my tech investments? And the war in Ukraine,
you get this spike. Get off of fossil fuels.

If they're the cause
of the problems, move quickly away from the
cartel of fossil fuel providers and move to this new
system: wind and solar. If you can capture
it and store it, and you can make
it at source, you don't need to be transporting
it around the world, having wars intervening with
your pipelines, and so on. Our next suspect
is Tucker Carlson. He was instrumental in leading
this US political backlash against ESG. Because of ESG, Germany is
now rationing electricity. Because of ESG, farmers are
in revolt in the Netherlands. Carlson is arguably
more responsible than any other individual
for dragging ESG into the heart of
the culture wars. Carlson helped to move the
political needle in such a way that we've now seen very
high-profile politicians, notably Florida
governor Ron DeSantis, talking about ESG all the time. We've seen financial
institutions

under really quite serious pressure, through various means, including withdrawing billions of dollars in portfolio assets from certain asset managers, which is what some Republican state governments have been doing. It's not really that surprising, therefore, that a lot of them are at the very least going a lot quieter on all this ESG promotional stuff. Separately to GFANZ, there's been another initiative, also very important, called Climate Action 100+, asset managers using their clout to put pressure on the companies that they invest in. The first phase was very much focusing on disclosures. Second phase was what companies were actually doing. So we're no longer just talking about disclosing data. We're talking about companies taking action to reduce their emissions. Some of the members, particularly US members, BlackRock, JPMorgan Asset Management, Pimco, Invesco, State Street, at this point they got worried.

It might not be in the
interests of their clients, of their investors, for
these asset managers to be telling all
these companies to reduce their emissions. BlackRock, which is by far
the biggest asset management company in the world, became
a central part of this story, partly due to the role played by
its chief executive, Larry Fink. There was a period
when he seemed to be arguably the most
prominent standard bearer for ESG. Larry's vision around how we
can use the gears of capitalism to fix its own
shortcomings. Capital starts to flow towards
more responsible providers in society. This was all a very alluring
thesis because you make money and you improve the
world at the same time. BlackRock, and Larry
Fink in particular, became really central targets
for those political and media attacks, especially
from the right. BlackRock has certainly
become less vocal around ESG.

In fact, Larry Fink
now says that he prefers not to use that term. Do I think he's one
of the bad guys? I don't. They've created some of the
biggest clean energy funds in the world that are making
money for their investors. That's their job. They do that very, very well,
with a lot of pressure on him politically. Yeah. And did he fold a little bit? Yes, he did. But I think anybody under
that kind of pressure would have responded
in the same human way. In 2022, Northern Trust put
out one of its regular surveys to get an idea of what
the priorities are for asset managers. And in 2022, at the
start of that year, before Russia's
invasion of Ukraine, ESG was top of the list. 2024, it has absolutely
dropped down the list. In Europe, there
is far more support from government regulations.

Public opinion is probably more positive on sustainability. The oil and gas industry is simply a bigger part of the economy in the US than it is in Europe. There is a much higher proportion of the population in the US who question the science of climate change. The change we've seen in the US is worrisome, because there is less focus on the climate initiatives that the companies take. It has not changed the way we do our business. We have roughly 3,000 meetings with companies every year. We would discuss governance, and of course, also, climate. We vote at roughly 12,000 AGMs every year on 120,000 proposals. Even though we only account for 1.5 per cent of all the votes in the world, we also see that we have roughly an additional 3 percentage points of kind of additional influence, i.e., other shareholders who follow what we do. And we've also seen, in terms of the flows of money,

we've seen bigger changes
in the US than in Europe. Some in the asset management
industry saw the rise of ESG as a great opportunity. Inflows into ESG funds
were really, really strong on both sides of the Atlantic. In the first quarter of
2024, we still saw inflows into sustainability-focused
funds in Europe to the tune of something like $11bn, whereas
in the US, it was the single worst quarter that
Morningstar has recorded. Nearly $9bn came out of
sustainability funds. E, S, and G are
three letters that do not leave your
mouth if you are on marketing trips across
various states in the US, if you're an asset
management firm. Do I think the big asset
managers helped end the party? No. I think big asset
managers smell the wind, and if they think
there's a backlash, they'll be very, very
fast to change course.

Tariq Fancy, previously the chief investment officer for sustainable investing at BlackRock, has since become a vocal critic of the approach to ESG that's been taken in large parts of the asset management and financial industry. The ESG thesis around society improving because companies discover social purpose, it's a free market self-corrects thesis. It's a neoliberal, the free market will figure this out because people will have new data frameworks and companies will start to do the right thing on their own. If you're a consumer-facing brand, it's not a good idea to have a supply chain issue with slave labour. But for the majority of the companies in the economy, it doesn't really matter. The reality is, they're going to do whatever the cheapest thing they can do is, and they're going to do that within the rules. And I don't think that we should impugn business people.

for making the
decisions that are in the interest of
their shareholders. They're playing the game
exactly the way they should be. And his argument is that
the appropriate response to climate change and
these other challenges must involve policy from
democratically accountable governments. What do we actually
need to do to address some of these problems,
and where does that incur short-term
sacrifice, and how do we impose those sacrifices in a way
that's mandatory and systemic? Maybe, in the absence of
serious government action, there is a real tension between
fiduciary duty and the kind of action that Climate
Action 100+ was calling for. You should have a
reasonable expectation that wherever you've got
your pension money parked, someone, somewhere
is doing the best possible job they can to make as
much money for you as possible. How would you feel if the asset
manager running your pension plan made certain
ESG assumptions?

that you don't agree with? And what happens if those
assumptions are wrong, they're too severe, and
that actually costs you 2 per cent to 3 per cent a
year on financial performance? I think climate risk... the challenge is that
it's quite long-term. So a lot of
investment strategies have a horizon
that really doesn't think about the long term. If you are a
short-term hedge fund, you're going to own the
securities for 24 hours. You may not care. But if you are a
universal owner that is going to own that
securities for 50 years, you are going to care
immensely about what's going to happen to that company. In 30 years' time, we
could be through 2 degrees. We could be past tipping points. We could be in climate chaos. Investing to avoid
that happening is the most responsible thing
you could do as a fiduciary.

We have one overriding goal with this firm, and that is to make money. Climate is a financial risk. You need to take it into consideration in order to fulfil your fiduciary duty to your investors. Another suspect would be Desiree Fixler. Desiree Fixler was the head of ESG at DWS, big German asset management company spun out of Deutsche Bank. She really exposed the practical problems that big investment firms have measuring this investment for good and proving this investment for good. There was a tremendous gap between what the company was saying publicly about their ESG capabilities to what they were actually doing internally. You can't mislead your shareholders and investors. You can't misrepresent. And you certainly can't mis-sell your products. Wirecard was placed as a top position in a DWS ESG flagship fund in 2020. So at a time when E&Y won't sign off on their financials.

DWS actually upgrades Wirecard
on better corporate governance and cites business ethics. Marcus Brown, the CEO of
Wirecard, has been arrested. Jan Marsalek is on the run,
and the company is insolvent. There was a statement
once made from a CEO: You and your American
friends are paranoid. My American friends? Is he talking about
the SEC and the DoJ? I was a tremendous
pain in the ass. I just didn't stop. And finally, at my
last board meeting, I pretty much
banged on the table that these are urgent issues. It was a matter of a few
weeks later I got fired. I knew that greenwashing
was absolutely pervasive in the market. ESG became a huge marketing
tool for other asset managers. I knew that most of the claims
out there were bullshit. I decided to go public. I had documents. I had evidence. It's really been one of the
most impactful whistleblowers.

allegations. There was a high-profile
raid by authorities in Germany on a DWS office. DWS dramatically reduced
the quantity of assets that it's claimed to manage
under ESG principles. I know that I
definitely contributed to killing this ESG party. One of the biggest
problems with ESG is, how do you
measure this stuff? That's created an opportunity
for ratings and index providers, the biggest of which, in the ESG
space, is a company called MSCI. So an ESG rating is an opinion,
how those variables will impact the financials of that company. The way that I
want to measure it will almost certainly be
different from the way that you would
want to measure it. We're going to arrive
at different opinions. We're going to arrive
at a different rating. Because we're not just
talking about climate stuff. We're also talking about social
stuff and governance stuff.

Different ways of measuring virtue come up with different results. It is something that will develop over time. Clearly, it takes effort to understand those characteristics. And it will take even more to price those characteristics into the value of assets and to the allocation of capital. I've had many conversations with clients where they were very confused by some of the rating agencies, where the same company was rated very highly by one agency and very poorly by another agency. Controversy around that industry has led to growing calls to regulate them, and we're seeing movement around that, particularly in the EU. You cannot regulate ratings themselves. Regulation on ESG has to be more on the ingredients that you're using to come up with a rating. If I'm an investor and I look at an opinion by MSCI, and I look at opinion by others, and then I form my own opinion, that's a richer world than simply somebody giving it

to you directly. When you go buy a
product in a supermarket, it's going to tell you
what the ingredients are, how much salt they have,
how much sugar, how much fat, and other sources. You're not going to
tell people whether they should eat the sausage. That is a free
choice in a society. There is a need to
scrutinise data. But in the end, when it comes
to opinions rather than data, diversity of opinion actually
enhances the investment process. It's not really possible to
prove whether a company is completely green. What if the product that
it produces is green, but that further down the supply
chain, the other companies that it relies on, what
if they don't quite meet the same criteria? What if they're not quite as
virtuous as the ultimate company that an investor is
choosing to invest in? ESG is an umbrella term, and
it means many different things.

to different people. It can be a risk
management feature, how the outside, changing world
might affect the company you're investing in. It can also mean how the
company you're investing in affects the outside world. The idea was that you take ES&G
factors into consideration when you look at a stock,
or a bond, or an asset. But that morphed
in people's minds to thinking that ESG is a
measure of a company's goodness. Does it do the right
thing by the environment? Does it have a nice culture? Is its governance any good? And if I buy a company
with a good ESG score, I'm buying a good company. That is nonsense. ESG is not about doing good. It's about being a
long-term, sensible investor. If you're a
long-term shareholder and you care about
financial returns, you need to care
about the climate as well, because the climate
effects, for instance,

on inflation is stronger
than it's ever been before. We see it in harvests. We see it in
reinsurance premiums. You need to care
about executive pay because you want to have
a sustainable situation. You need to care about
diversity at board level because those boards
with better diversity generally perform better. What does climate have to do
with labour laws in a certain country or diversity
and inclusion? So an alert system morphed
into an investment strategy. Those are two very
different concepts. One is risk management. The other one is
positive impact. If something has
an ESG label on it, my mum will think it must
be full of good companies. No. I might go in to a
client and show them a company that
they think is bad. And they'll go: you've got
an oil company or an airline or a cement company
in your portfolio. It's got a low ESG score.

Why is that? And I'll say, well, it's so cheap that it takes those risks into consideration, and we think it's an attractive investment. I'm using definition one, they are using definition two, and we don't understand each other. And that is a fundamental problem that is still around in the industry. It was sort of smashing together a bunch of things that are unrelated so that you can have a very simple, single indicator of virtue while minimizing tracking error against an index. And the goal is, ultimately, if you could figure out how to take your product and make a few changes such that the return dynamics are the same or very similar, but you have a slightly greener basket which might just mean, as we saw, underweighting fossil fuel players and then overweighting tech companies. And what Wall Street played on dressing up risk management products on well-run companies, investors

were thinking they
were investing in portfolios that were offering
environmental and social benefits. That wasn't the case at all. Our final suspect
is Stuart Kirk. Stuart Kirk worked
as an FT journalist, and then went on to work as the
head of responsible investing at HSBC Asset Management. And he was in that
role when he came to give a short speech
at an FT Moral Money conference in London. Sharon said, We are
not going to survive. And indeed, no one
ran from the room. In fact, most of
you barely looked up from your mobile phones at
the prospect of non-survival. The Sharons and the Mark
Carneys of this world need to tell us why prices are
going up with our own demise. I was in the room when he
made that presentation. It did go down like
a cup of cold sick. He did open up a conversation
around the inconsistencies that are inherent in ESG
that wasn't previously there.

So he has to take a share of the blame here, I'm afraid. And I don't think
he imagined that it would gain quite as
much momentum as it did or lose him his job. To be suspended straight
away is discombobulating. And I still have
not, to this day, spoken to any of my colleagues. Horrendously
stressful for anyone who does this for a living,
anyone who's got four children, anyone who's got a
sensible job, and has tried to work hard and
do the best they can for their employer,
which I've always done. Now, I've been through a lot
of bubbles - dotcom bubbles, emerging market bubbles. You could always say
stocks were overvalued. I think this is nonsense. Here's another viewpoint. And you would debate
it within a firm. Never in my life have
I been in a bubble where you could not
critique it at all.

with risk of losing your job. If my sacrifice
was worth anything, it was allowing people,
for the first time, to voice legitimate and
necessary criticisms of something which
needed to be open. And I know that from
the thousands of emails I got from people
saying, I was also fired for making a
mild criticism of ESG. Over the past 200 or 300
years, global growth, global development exploded
based on a fossil fuel foundation. We've now realised that fossil
fuels are cooking the planet, and we have to move as rapidly
as possible to the post-fossil fuel age. That's the future. Enormous fortunes will be
won and lost as part of this. We need to create new,
low-carbon performance benchmarks, and that
requires a complete rethink by pension fund trustees
to reflect this world that we need to build instead of
reflecting the world that we're trying to exit. What has gone out of
fashion is the term ESG.

And maybe that's a good thing. This shouldn't be a party. We are not talking about
a party, or not a party. We are talking about
the future of humankind. A lot of the same
financial institutions that are telling
us to rely on ESG are active behind the scenes,
taking advantage of traceless and often limitless
political spending to influence policymaking. We will not be speaking of ESG
any more 5, 10 years from now. And that is because
sustainability will be embedded in how we invest. What I call option
one, ESG as an input, will just melt into the existing
investment process and will just disappear, because everyone will
realise we should all be doing that anyway. The exciting thing will
turn to the goodness scores, and funds will be
properly labelled, and they will have a big
thing on the top saying, this goodness may
affect your returns. And someone will
go, you know what?

I don't mind 4.5 per cent
instead of 6 per cent. And they will choose
those funds legitimately, and everyone will be happy. For anybody to think or say that
ESG is dead, that ESG is not going anywhere, that
it was just a label, that it's just a political
philosophy, I'm sorry to say, they're all wrong. We think ESG is about
as political as gravity. It's not political. It's about thinking long term. And it's about thinking
about your returns. This is the death
knell for fossil fuels. And people holding
oil and gas thinking that this is a long-term
growth opportunity, they're going to
get caught short. The majority of Gen
Z and millennials don't believe in capitalism. Leaders of that system stand
up on a stage and they say: we know these are big problems. Climate change is critical. We have to solve them.

And they talk about ESG
and stakeholder capitalism. And every single
year, those young kids who, again, they didn't
learn climate change is real because they
watched a documentary years after they left school. They learned it like we
learn Newton and gravity. So they know it's real. They see the leaders
of the system say, It's really important. We're going to do
something about this. And every single year,
profits keep going up, and the scientists tell
us that we're getting further and further behind. There's a significant
concern I have that we'll see political
instability as people try to overthrow the economic
system long before we actually get to 2050 and see if net
zero actually plays out. There is money to be made
from the green transition. It makes perfect sense
to put my pension money and yours into
green technologies that are going to be
used all over the world and that are essential if we're
going to get ourselves out

of this climate hole. What's important is
that serious work is done to really grapple
with the challenges and the opportunities
that we face. And those who do
it right will be surfing the wave of the single
biggest economic transformation, and one of the
biggest opportunities in the whole history
of human civilisation.

Who killed the ESG party? | FT Film

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