ESG, HAS THE BENDER ENDED?

Investire | February 2023

At first, it looked like a dream. The whole financial industry, often and quite unfairly deemed cynical and misleading, seemed to be converting to a good cause: ESGs.

Over the past years, everyone tried to regain, so to speak, their virginity by acquiring as many article 8 and article 9 funds as possible for their portfolios.

Then, all of a sudden, the craze ended. Or better, it has become less frenetic. There are two main reasons.

The first is attributable to the regulator, who enforced more stringent rules on ESG funds in order to contain the phenomenon of greenwashing.

As a result, several AMCs backed down. Instead, they downgraded former article 9 and article 8 funds in order to prevent possible reprimands and/or sanctions which may have damaged their image.

Secondly, the United States, which tend to anticipate tendencies that will eventually reach the old continent, seem less and less favorable to ESG funds.

So, has the bubble burst once the craze ended (supposing that this is a trend)?

In truth, (real) ESG investments take time, resources and energy to reach full maturity, as any other product that respects procedural guidelines and has a quality assurance label.

Far from being blasphemous, the comparison with wine is maybe more appropriate than one might think at first.

Quality requires time, both for winemakers and for ESG managers.

The same applies to the demand: for wine connoisseurs and for those who can appreciate a good fund.

In addition, the importance and value of the ESG label. 

Environmental issues – represented by the E of the acronym – have been fully assimilated, alas, only on a conceptual level. Therefore, they appear little distinguishable and thus at risk of homologation, or worse, lack of credibility.   

Similarly, issues pertaining to social impact – represented by the S – have an absolute and universally shared value. However, they are harder to grasp fully.

Not to mention the G of the acronym, or governance: albeit being the most all-encompassing element, it remains for insiders only (very much appreciated by private end investors, and cryptic for mass market clients).

Finally, how important are the numerator and denominator in the return/ESG ratio? That is, how much of their return would individual investors be willing to give up for an ESG compliant investment?

The answer comes from the markets which tend to anticipate tends (first and foremost, USA and UK) and it is very clear: when people invest their money, they wish for it to produce maximum economic return, certainly not to the detriment of the environment, society and rules, but for the benefit of their wealth.

Going back to the wine metaphor, there are three alternatives: 1) producing the Sassicaia wine of ESG funds with very few lucky connoisseurs in mind; 2) aiming at “Tavernello-quality” products, thus favoring quantity; 3) becoming teetotal.

Maybe the ESG bender is gradually fading and this, far from hindering them, will allow each single investor to look at ESGs with more clarity of mind and appreciation.

Nicola Ronchetti