Joseph Mariathasan: ESG investing – beyond virtue signalling

One investment theme that will only grow stronger in 2019 is that of incorporating environmental, social and governance (ESG) criteria.

Few fund managers are willing to stand up and declare that they do not take ESG criteria into account, but how many actually move beyond ‘virtue signalling’?

ESG advocates often argue that such investment policies and approaches make sense because ESG-focused funds outperform – but proving those results may be a red herring. 

Companies themselves are under increasing pressure – and rightly so – to take ESG issues seriously, but to do so may require a more detailed approach to analysing supply chains than headline-grabbing actions with questionable motivations.

Frozen food company Iceland made headlines in April 2018 when it announced a ban on the use of all palm oil in its products by the end of 2018. It also produced an advertisement based on a shortened film from campaign group Greenpeace highlighting the detrimental impact of palm oil plantations on the environment, closing with the emotive phrase: “Dedicated to the 25 orang-utans we lose every day.”

Was this the actions of an enlightened firm driven by the desire to ensure impeccable ESG credentials? Or was this just a cynical marketing strategy of virtue signalling guaranteed to hit the headlines and encourage the ethically minded to switch their weekly shopping to Iceland?

It was certainly successful as an ad campaign, as by early December 2018 figures from industry newswire PRWeek showed that the advert had been viewed 65m times across social media and Iceland’s own channels, making it “one of the most viewed Christmas campaigns of all time”, according to PRWeek’s report. Moreover, it appears its success helped to shift the dial in how consumers perceive the brand, as well as providing an uplift to sales.

Banning palm oil completely, however, is actually quite bizarre. Making supply chains sustainable is the key to ending large-scale tropical deforestation, declares lobby group Global Canopy, and even Greenpeace declares that palm oil can be grown without destroying rainforests.

Palm oil itself is the most efficient source of vegetable oil, providing – according to some estimates – a third of the world’s vegetable oils from just 10% of the land used for all oil crops. Replacing palm oil with other edible oil sources may require five times the land currently being used for palm oil, according to this column from the Oxford Student newspaper. It is five times more efficient than both rapeseed sunflower oils and up to nine times more efficient than corn and soya.

Banning widely used commodities altogether is a nuclear option that should only be undertaken when strictly necessary. What matters is that commodities are sourced from ethically aware companies that produce them in a sustainable and responsible manner.

Not only does that provide valuable income to, in many cases, poor communities across the globe, it also encourages the growth of sustainable and ethical practices in agriculture and mining through the pressure that global consumer companies can apply to the companies in their supply chains.

Ensuring that commodities are obtained from acceptable sources, not banning them, must be the key. Determining the nature of the sourcing of products may have been a problem in the past but is certainly not the case now.

There are many organisations that have focused on looking at supply chains in detail and the required information is available online. Trase, for example, uses publicly available data to map the links between consumer countries via trading companies to the places of production in unprecedented detail. The results can be quite surprising.

For ESG investing to succeed as a strategy, what is required is less of the virtue signalling and public posturing, and more real analysis of supply chains and decision-making based on encouraging behaviour by companies that is ethical, sustainable and fair to all their stakeholders.

Rather than banning the use of palm oil – or, indeed, any other agricultural produce – the world would be better off if more attention was paid to global supply chains with entities involved in every step sharing the responsibility for placing commodity production on a more sustainable footing.