ESG as a Distraction

    Like that elusive white rabbit, the spectacular collapse of a certain Californian bank has been beckoning many of us down a vertiginously deep hole these past few days. I nosedived right into it myself, discovering so many doors to open and side tracks to explore down there! It’s fascinating, and utterly perplexing. Yet, appealing as it might seem to follow the obvious leads and trust the headlines, it is hardly the wisest of strategies, as Alice might tell you. We should know better than to swallow the unknown contents of a shiny flask, even if its label says, “Drink me!”

    A particularly poisonous line of reasoning has been developing in the land of the free and the home of the brave anti-ESG campaigners. The idea is to blame the fall of Silicon Valley Bank & co. on ESG’s distracting, ergo destructive powers. “These banks are badly run because everybody is focused on diversity and all of the woke issues and not concentrating on the one thing they should, which is, shareholder returns,” as Bernie Marcus, Home Depot co-founder, summarises it. Wall Street Journal columnist Andy Kessler seems to share his view, developing the argument in a widely quoted opinion piece. “In its proxy statement, SVB notes that besides 91 percent of their board being independent and 45 percent women, they also have ‘1 Black,’ ‘1 LGBTQ+,’ and ‘2 Veterans.’ I’m not saying 12 white men would have avoided this mess, but the company may have been distracted by diversity demands,” writes Kessler. And, yes, our all-time favourite tweeting ex-president is at it again, offering his opinion freely: “SVB is what happens when you push a leftist/woke ideology and have that take precedent over common sense business practices.”

    Apart from this ‘wokeness-as-a-distraction’ theory, however, none of the outspoken ESG critics offers an explanation as to which sustainability-linked investments, in particular, would have caused SVB’s failure or how the demographics of its board might have done so. Most finance professionals seem to agree that the bank’s misfortunes were caused by a classic asset-liability mismatch. Succumbing to logic, even a self-proclaimed anti-ESG champion as the CIO of Strive Asset Management, Matt Cole, is adamant that the bank’s collapse had nothing to do with its wokeness. “SVB stood out in taking stupid investment risks, period,” he concludes in his brief analysis on LinkedIn.

    Before you discard the ESG distraction theory altogether, however, consider the role it might have played for those unfortunate equity and bond investors[1] caught up in the bank’s collapse. Apparently, there is a disproportionate number of ESG-conscious asset owners and managers among them. Could they have been lured by SVB’s partiality to renewable energy companies in need of loans or by the bank’s exemplary ESG reporting, generously offering all the prescribed disclosures?

    Meanwhile, many of these ‘responsible’ investors seem to have overlooked entirely the tailing ‘G’ in their beloved acronym. And we are not talking about any deeply hidden evidence, either. Just hours into Fed’s investigation of the bank, for instance, they stumbled upon the fact that SVB didn’t have a chief risk officer for most of last year, as reported by Bloomberg. Or, how about the detail that the bank’s CEO, Greg Becker, sold USD 3.6 million worth of shares on 27 February, just days before the bank disclosed a significant loss that triggered its stock slide and collapse? He and his fellow SVB executives and directors reportedly cashed out USD 84 million worth of stock over the past two years. You’d think that might raise an insider trading red flag or two.

    Murky as it still is at the bottom of my rabbit hole and that particular ESG juncture I’ve chosen to explore, some things are quite clear. The curious case of SVB goes to show that no truly responsible investor can afford to be distracted by glossy headlines, neatly packaged ESG ratings and labels. Sustainable investing should be about paying more attention to fundamentals and material risks, not using ESG as an excuse to disregard them.

    [1] Among them, Swedish pension giant Alecta and Norway’s NBIM, currently looking at billions of losses.

    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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