ESG investing is political. But this is not the real issue with it.

Two overlooked issues that should be on every investor’s ESG list of concerns

The fact that ESG investing is political in its approach towards capital allocation is evident to any honest person. However, investing, in a sense, has always had an element of proximity towards politics. For example, investors often consider the policies of particular parties before looking at a sector or a particular asset class and asking questions such as “how will these politics affect the prices of certain assets?”. These matters of common sense are on the minds of small and big investors alike.

In the big investment houses however, the analysis of political dynamics takes on a new level that goes beyond what a retail investor can do: there is no secret that many analysists spend their time pouring over polls of what candidate is likely to win an election and then working on scenarios of what the win may mean for a bunch of asset classes. From trade disputes to party scandals, politics play a (more or less important) role in making an investment decision.

And, to be completely honest, the investment world is no stranger to lobbying – among large asset managers the process of sitting at the same table with the men and women that make the rules of the game in order to “educate” them about the needs of the industry (there is only one need – more profit) is a favourite way of professionally implying that they engage in what others call “lobbying”.

Only last year, in April 2021, the Wall Street Journal reported how the Securities Industry and Financial Markets Association (a trade body, a.k.a. a lobbying group) organised a call with congressional staffers and senior figures from large investment firms to “avoid antitrust scrutiny”. The other side – the regulators, the politicians, the lawyers – are also quite glad to “be educated” by the industry. After all, they are big clients.

As such, politics and capital allocation have been complementing each other in various ways for a long time – maybe since the dawn of civilisation. However, what makes ESG investing distinct is that, unlike other investment methodologies and products, politics are the heart of it, not an auxiliary “nice to have” component.

The Politics of ESG: An Overview

When one says “ESG investing” the “ESG” means politics and the “investing” means capital allocation strategies and products. Therefore, politics is the primary consideration of putting money at work within this framework.

As Sasja Beslik, a Senior Executive in Sustainable Finance and author of Where the Money Tree Grows, explained in one of his weekly LinkedIn newsletters “ESG is geopolitics. Climate change is geopolitics. Human rights are geopolitics. All of us who are working with ESG are deeply entrenched in the geopolitical agendas […]”.

To expand on the pragmatic views of Mr. Beslik: the fact that ESG is geopolitics means that when big asset managers, regulators, politicians, top CEOs and narrative builders in the academia and mass-media talk about ESG related issues (a table of them can be found below) they are actually taking a position that is nation vs. nation, bloc of nations vs. bloc of nations, West vs. East in matters of security (cyber or military), economy and political influence.

The table above has remained largely unchanged in 2021 based on a number of surveys, such as this one from Research in Finance and Morgan Stanley.

Consequently, from a geopolitical perspective, if we are to focus on the first ESG-related concern (climate change), what the investments backing this initiative mean are a re-focus of energy resources, as well as a search for new energy sources which, in turn, shall result in a re-balancing of political power. For example, if European nations like Germany and the UK can rely more on renewable energy produced at home rather than on gas imported from Russia, then the influence of the latter will be reduced. Whether this energy transition can be achieved and how it can be achieved are questions for another article, however.

There is another dimension to the ESG, if you scrap the “geo”: the political element, in addition to the above tensions reveals another level – the individual vs. a state, company, international institutions, lobbying bodies and so on. This element is however often overlooked in conversations around ESG and is related to the title of this essay, i.e. to the real issue with ESG investing. Namely, the political agenda behind ESG is incomplete.

The political nature of ESG investing has attracted plenty of criticism. Although, the core ethos behind this way of allocating capital may seem noble, given that throughout history good intentions that are too grandiose have resulted in great catastrophises, I too have my reservations regarding ESG as I wrote at length in a previous newsletter. 

However, we are not going to discuss in this article whether the type of politics behind ESG investing are of an inclination that is agreeable or not, nor whether the capital allocation based primarily on political agendas leads to efficient usage of that capital or not. Here we shall simply accept that ESG investing is political in nature and point out that on the list of priorities (as displayed above) there are two that are missing. These two are of outmost importance for the development of the individual – the most important raw material in the economy, part of the human capital that makes corporations and governments function. These two priorities are Cultural Heritage and Religion.

The Missing ESG Concerns

In 2016, the United Nations issued a reported called “Protecting Cultural Heritage – An Imperative for Humanity”. Although short, the document articulated the need to preserve cultural heritage quite neatly:

“There is heightened concern today over the unprecedented scale of organized looting and trafficking – often combined with the intentional destruction of cultural heritage sites – especially in the context of crises in the Middle East. While the perpetrators of these acts benefit from the profits of looting, which support their recruitment efforts and strengthen their operational capacity, they also seem resolved to eradicate cultural diversity from the territories under their control. In addition to the loss of irreplaceable cultural heritage, this has led to heinous violations of human rights and fundamental freedoms.”

The urgency described above can be extended to places outside the Middle East which face a different type of threats, but which results in similar outcomes for the statues, buildings and places of similar cultural significance: decay and ultimately, destruction.

These risks include lack of underinvestment by the public authorities in some countries (like Portugal and Greece for example), bureaucratic nonsense (such as the EU’s requirement for sights of cultural heritage to prove their “sustainability” in order to get funding), riots and hooliganisms, to a profound lack of visibility due to few or no media coverage (for example, how many have heard of the Italy-UNESCO cooperation held in 2021 to protect underwater cultural heritage, or any important collaboration of this nature?).

After all, preserving cultural heritage is part of the sustainable goals of the United Nations. Given that the signatories behind the UNPRI principles have grown both in number and in the quantity of assets under management, investors should have on their ESG agendas the preservation of cultural heritage.

Although cultural heritage sights can have economic impact as they can be commercialised for touristic purposes, ultimately, the return on these investments is not and must not be financial: it enriches the individual, making one desire to cherish the society one lives in. In other words, it is a spiritual, communal and educational return. However, for this sort of mentality to prevail, the concept of “investment return” must be re-thought, as I have argued before.

Nevertheless, investing in cultural heritage, the masters of capital, in collaboration with the state, have a chance of doing something truly important for the smallest and most at risk minority on Earth: the individual. After all, we hear a lot of talk about the partnership between private and public sectors coming out of Davos – it is time for these elite figures to deliver on their words.

A similar line of thinking goes for ESG investing in Religion, where we can include religious centres and religious education. Funds can be dedicated towards a particular religion or, even better, spread the allocation equally among centres and projects that touch on more than one religious path. Exactly how these funds ought to be distributed however is a topic for another time. For now is sufficient to point out the need for such an allocation under the banner of ESG investing.

One of the areas that could benefit from investing in religious buildings and education centres can be closer to home for investors from developed nations. Indeed, across rich countries, the trend of secularism has pushed aside the importance of religion in the life of the people. As I argued in “Western civilisation and religion in a secular age”, this development is not as positive as some may be quick to point out.

The religious impulse cannot die – it is part of who we are and if we neglect it or try and replace it with other manmade alternatives, as the last couple of centuries have showed, the consequences of even the most noble intentions can turn to hell on Earth. As Kalakowski observed:

“Religion is a paramount aspect of human culture. Religious need cannot be ex-communicated from culture by rationalist incantation. Man does not live by reason alone.”

The degradation of religious buildings differs from place to place. In the UK however, the situation seems dire. In December 2021, The Spectator reported that “churches are being turned into luxury flats, nightclubs and — in one case I’ve seen — a Tesco Express. That’s if they’re not erased altogether, as many were during the 1960s when town planners demolished countless 19th-century churches, replacing them with car parks and shopping centres.”

ESG investing can put a stop to all of that and provide funding to religious buildings – not only confined to Christianity, of course – in order to prevent the places of worship from being desecrated, demolished or abandoned. As a report by the European Parliamentary Research Service in 2020 highlighted:

“Faith-based organisations are playing a pivotal role in a number of new fields, including climate change, development and conflict resolution, and the EU is increasingly taking these organisations into account. In addition, religion plays an important role in the internal and external policies of some key EU partners, as shown in the case studies at the end of the analysis. That is why this field is slowly emerging as a new dimension in the EU’s external policies.”

Furthermore, faith-based investing, in many aspects, is the original impact investing. The Interfaith Center on Corporate Responsibility states on its website that “the tradition of faith- or values-based investing is centuries old, even if it wasn’t formally defined as such. Religious investors from Jewish, Christian and Islamic faiths as well as many indigenous cultures have always carefully considered the impact of their financial decisions on others and have formal guidelines prohibiting investments that violate their traditions or beliefs.”

Some asset managers are already taking religion into account when they think about ESG. However, the number of investors that think about religion remains small – for now.

A recent Bloomberg report suggested that ESG assets may hit $53 trillion by 2025, “a third of global AUM”. Also, many of the ESG products are not conditioned by a specific theme, data from Morningstar illustrates. This means that investors have the freedom to focus on both Cultural Heritage and Religion as part of their ESG investing.

One way of bringing the two themes on the ESG consideration list is to invest in companies that have projects in preserving cultural heritage or religious presence in society. An alternative is to partner with organisations like The Christian Investment Forum which promotes certain funds based on ESG criteria. This is the opportunity for the asset management industry – the $100 trillion machine – to be proud of its capacity to innovate, i.e. to financially engineer new products.

Therefore, the fact that ESG investing is political does not pose a problem in itself. It is where the focus of the politics falls. If however ESG investing is to remain true to its ethos, then the two themes – Cultural Heritage and Religion – ought to be on the list of concerns for capital allocators.