At the Climate Capitalist we encourage investors and companies to capitalize on the enormous opportunities presented by the accelerating Clean Energy Transition (CET). Trillions will be spent annually over the coming decades to cut polluting emissions and revamp the global economy away from fossil fuels. Many investors think they’re doing that by adding Environmental Social and Governance (ESG) factors to their traditional investing metrics. Indeed, “ESG” has become a loose acronym for doing climate investing. Sadly, even though ESG investing has produced good returns and become ingrained in the investing world, it’s mostly a head fake when it comes to investing, and profiting, on climate progress. It’s a way to rank companies across all sectors of the economy but doesn’t focus on companies capitalizing on the Clean Energy Transition. ESG may be decarbonizing your portfolio but it's not decarbonizing the planet. Climate-focused investors need to re-think how they can most effectively and profitably invest going forward.
The problems with ESG are many. To start, if the main goal is to invest in the CET, that goal is necessarily diluted by the inclusion of Social and Governance factors. The very best “E” company in our view is Tesla, but it’s not a standout on the “S” and even worse on the “G”. The same would go for many of the mining and material companies that provide inputs for EV batteries.
Moreover, what differentiates a “good” ESG company from a “bad” one is all over the map. It’s hard to know if your ESG investment dollars are achieving their intended ESG goals. There are a variety of complicated ways that ESG is measured and implemented. For example, we have been critical of the high ratings of Coca Cola and PepsiCo as ESG companies, because they are poor on air pollution/emissions, are the largest contributors to plastic pollution on land and in the oceans, and their sugary and salty products harm human health.
Companies can pretty much say anything they like to the ESG rating groups, as there’s guidance but no requirements for verification or accountability. When ESG rating firms get “garbage in,” they put garbage out. At this point, virtually every public company has an ESG story about what they’re doing now and making unenforceable promises about their future actions.
We suggest that, instead, investors and companies deploy capital into the companies that are at the forefront of executing the clean energy transition. We have done a video primer on how to invest across the CET asset classes: Venture Capital, Private Equity, Public Equities and Project Finance. And we produced a table showing stocks and symbols in the public equity arena for each of the CET sectors: Renewable Generation, Electronics and Semiconductors, the Grid, Power Storage, Transportation, Nuclear Power, Carbon Markets, Hydrogen, Recycling and Water. We have also advocated in a piece that large and sophisticated investors consider amassing shares in oil/gas/utility companies that are not progressing to clean energy and vote their shares to install new forward thinking management – the opposite of divesting shares as ESG advocates would have you do.