Name: Breakingviews-Guest view: Woke markets present growing dangers
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Breakingviews-Guest view: Woke markets present growing dangers

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By HONG KONG (Reuters Breakingviews) - The politicisation, and even weaponisation, of ESG investing is a growing concern. What used to be a reasonably well-mapped and steadily expanding universe of disclosure, compliance and risk measurements affecting market capital allocation has now become a nebulous and sometimes disingenuous race to rate, judge and sanction.These changes are introducing meaningful new risk that on the one hand has resulted in “greenwashing” by devious market participants and on the other hand a rush to politically correct policy directions and populist capital allocation decisions. It may in the end distort capital flows in a manner that is counterproductive to enhancing the awareness of ESG objectives.The implications are broad. Companies like ours – a Hong Kong-based group with operations in container ports, telecommunications, infrastructure and more around the world – need to take account of several recognised and adopted frameworks that are in varying stages of development. Beyond these, there are hundreds more vying for the attention of disclosers.We also need to track and comply with a rapidly changing landscape of regulatory frameworks applicable to ESG disclosure being introduced by governments, securities regulators and stock exchanges. There were over 800 such regulations in 2019, up from 200 in 2010.Irrespective of compliance obligations, the direction of travel in terms of ESG perceptions and investment flows is only going in one direction. The lack of product choices appears to be the biggest impediment. I am convinced that the consideration of ESG factors, and especially climate-related factors, will soon be the new normal in financial asset allocation. And it will happen quickly.ESG ratings are the starting point. The problem issuers face is that there is no consistency in approaches or outcomes. Ratings are not uniform in terms of materiality standards, they are inconsistent as to data gathering objectives and methodologies, and for the most part have little or no issuer engagement. Ratings are cobbled together from company disclosures and public data sources, and ratings are assigned under different methodologies that often fail to take into account country-specific factors.The combination of inconsistent and opaque standards, with an almost total lack of issuer engagement, leads to a generally low-quality ratings output, one at risk of being gamed by smart greenwashers.The data point I find most compelling on this is a 2019 MIT study which looked at the correlation of ratings provided for the same group of companies by the current universe of ratings providers. For ESG generally, the correlation was 0.61. Compare that to the correlations between credit ratings assigned by Moody’s and Standard &amp; Poor’s, which would run well over 90%.What needs to happen here, and quickly, is for something akin to credit ratings to distill out of the current chaos of ESG ratings. This requires a relationship between raters and issuers, a confidentiality framework that allows a full exchange of information without the selective disclosure risks, a standardisation of ratings factors approaches and the avoidance of conflicts of interest. Although the established system of credit ratings has not performed flawlessly – notably in the global financial crisis – it has overall provided a steady, credible and ubiquitous starting point for proper credit analysis.Ratings are just the beginning, though. What banks, asset managers and institutional investors do with them will largely determine whether the effort leads to positive sustainability impacts or just to misallocations of capital which would achieve little or possibly cause harm.Out of $50 trillion of assets under management recently analysed by Goldman Sachs, exclusionary approaches represented the highest single strategy at 36%. These strategies have significantly devalued sectors such as tobacco and coal. I believe such investment is quite dangerous, as it is prone to political and populist influence rather than science- and fact-based judgments. This is particularly true in oil and gas.The right answer is to look for the right overall role for oil and gas producers in both the world economy and the fight to mitigate climate risks. Projections from the International Energy Agency show that even under the most bullish projection for a low-carbon economy, by 2040, 58% of the world’s energy will still need to come from fossil fuels. We therefore need to make sure they come from companies that have the best ESG standards in place. I’d rather have an oil and gas company in Canada (which we do), than one in Venezuela, Africa or Russia. It would also be preferable to have a company that is reducing its own footprint by increasing the use of renewables in its power mix.The remaining 64% of assets under management that adopt alternative approaches to exclusion or divestment (i.e. positive screening, ESG integration and engagement) can, in my opinion, lead to positive outcomes if their frameworks evolve to become coherent, fact-based, science-based, sector and country specific, and adaptive to changing scenario risk analyses. That is the direction I am encouraging our company to understand and implement.Earlier this year, David Solomon, the chief executive of Goldman Sachs, grabbed headlines by stating that his bank would not take public firms that do not meet board diversity standards. He then – rather bizarrely in my view – added that the policy course would not apply to Asian companies. Personally, I find that statement a somewhat callous application of a politically correct bias. Insofar as it suggests that Asian companies are not capable of meeting global ESG standards, it is my hope that our company can contribute in some measure to dispelling the bias.Frank Sixt is CK Hutchison’s finance director and deputy managing director.Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.Sign up for a free trial of our full service at and follow us on Twitter and at . All opinions expressed are those of the authors.

By HONG KONG (Reuters Breakingviews) - The politicisation, and even weaponisation, of ESG investing is a growing concern. What used to be a reasonably well-mapped and steadily expanding universe of disclosure, compliance and risk measurements affecting market capital allocation has now become a nebulous and sometimes disingenuous race to rate, judge and sanction.These changes are introducing meaningful new risk that on the one hand has resulted in “greenwashing” by devious market participants and on the other hand a rush to politically correct policy directions and populist capital...

Breakingviews-Guest view: Woke markets present growing dangers

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