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Stuart Kirk returns to the ESG debate

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I saw a striking indication of the surging interest in environmental, social and governance investing this weekend, in the form of a huge crowd spilling out of a tent at the FT Weekend Festival in London.

Inside, Gillian was debating the merits and evolution of ESG with Stuart Kirk, making his first public appearance since the Moral Money Summit speech that prompted the abrupt end of his tenure as HSBC’s head of responsible investing.

Kirk has had a few months to consider the furious response to his remarks in May, when he argued that climate risk should not be considered investment risk. On Saturday, he seemed keen to emphasise the nuance of his message, arguing for a thorough overhaul of the ESG agenda to make it fit for purpose.

You can read Gillian’s account of their encounter below, along with Tamami’s reflections on the state of stakeholder capitalism in Japan, following the death of legendary tycoon Kazuo Inamori.

And there are plenty more ESG debates to come. Patrick and I are heading to Singapore, where we’ll be hosting the Asian edition of the Moral Money Summit on Wednesday and Thursday. We can’t guarantee Kirk-style fireworks, but the agenda promises two days of compelling discussion. You can join us in person or online — click this link to register. We hope to see you there. (Simon Mundy)

‘I am unemployed’: The latest from Stuart Kirk

Where will ESG go next? Where should it go? These are questions being hotly debated as US Republicans step up their attacks on the movement. (Check out my latest column for the headache this now poses to financial companies in the US.) But it is also a question with an emotive personal twist for Stuart Kirk, the former head of responsible investing at HSBC’s asset management arm (and ex-FT journalist), who lost his job this summer after criticising ESG at a FT Moral Money summit.

On Saturday, the FT published a thoughtful column from Kirk in which he explained that in spite of the storm he created with his comments, “I’m pro-ESG, as it happens” — meaning he likes the idea of sustainability in a general sense. The reason he criticised the concept, however, was that he was deeply frustrated with the way it was being practised. He argues that there is an urgent need for the people who create and use ESG ratings to clarify whether they are tracking the “input” effects of ESG (such as how questions of environmental change and social problems hit a company’s bottom line) or the “output” (how a company’s footprint in the world affects the climate and social fabric). Right now these are muddled up, and “this conflict leads to myriad misunderstandings”, he writes. 

Kirk is not the first person to point this out: Bloomberg ran a powerful investigation a few months ago, which illustrated how many investors thought ratings companies such as MSCI track “output” issues in their ESG ratings (companies’ impact on the world), but in reality they were more focused on the “input” question. And at Moral Money we have often noted that there is a distinction between accounting systems such as the Global Reporting Initiative, which tracks output issues, and others such as the Sustainability Accounting Standards Board, which focuses on inputs.

Even if Kirk’s point is not entirely novel, investors should read his column — not least because he hinted on Saturday, during a conversation with me at the FT Weekend Festival, that he was exploring ways to turn this “input” versus “output” distinction into a new class of financial products. To me, that makes perfect sense. He also argued, quite correctly, it was high time that regulators forced the financial industry to make a clearer distinction between “input” and “output” factors, when selling products to investors.

Another point that cropped up in our conversation was that ESG investors do not always appreciate where their leverage lies. The industry initially emanated in the sphere of public equity markets, and many ESG investors continue to focus on share portfolios in their strategies. But Kirk argued that equity flows have, at best, only modest impacts on companies and are unlikely to change C-suite behaviour. So if ESG campaigners want to shift the boardroom debates with equity investments, their best bet is to invest and engage with a company they hate — not sell out. However, the real weapon that ESG investors could — or should — use is debt. If banks cut loans to companies they dislike, or investors refuse to buy their bonds, this will hurt (which is, of course, why the Republicans are so upset that some large US banks have been curbing fossil fuel loans). Kirk thus thinks ESG activists need to shift their focus.

I agree with much of this. And I welcome the fact that Kirk raised these issues. Moral Money has always strived to illustrate all sides of the ESG debate, giving a voice to the critics and supporters, since we believe that unless the sector is subject to challenge and oversight, it will become prone to mis-selling and abuse. Yet the coda to Kirk’s story, which also became clear during our debate, is that he has paid a heavy price for challenging the conventional wisdom: after leaving HSBC, he is currently unemployed.

“I have four kids and I am pulling them out of private school,” he told the FT audience. This is likely to deter other ESG critics from following his path, if they are employed at large institutions that are as sensitive to reputational risk as HSBC. Which is a pity: the ESG sphere needs to uphold the principle of open debate — and challenge — if it is going to be “sustainable” in every sense. (Gillian Tett)

ESG in Japan: leader or laggard?

When the death of the famous businessman Kazuo Inamori was announced a few days ago, it got me thinking about Japan’s longstanding tradition of stakeholder capitalism — and why, despite this, the country is widely seen as a laggard when it comes to the modern ESG agenda.

Inamori’s fame as a management guru in Japan is equivalent to that of the former General Electric boss Jack Welch in the US, but their philosophies were nothing alike.

After founding two successful businesses — Kyocera, an electronics and ceramics manufacturer, and telecoms group KDDI — Inamori took a job at then-bankrupt Japan Airlines as a chair in 2010. Under Inamori’s leadership, JAL achieved a rapid turnround and went public again within three years.

Since retiring from Kyocera’s board in 2005, he had focused on training young business owners to become effective managers through Seiwajyuku, a management school he started in the 1980s.

Throughout his career, Inamori publicly stressed the need for business leaders to avoid a narrow focus on profit. A key lesson was that “management should build on the foundation of an altruistic mind and doing the right thing as a human being,” said Tomoko Omori, chief executive of Go Go Curry America Group and former chair of the New York chapter of Inamori’s management school.

When indoor dining was banned during the Covid-19 pandemic, Omori decided to transform her restaurants into takeaway and delivery joints. She says her priority was to ensure that her employees could keep working and being paid, at a time when many of their peers were being laid off. “Inamori’s teaching of doing the right thing . . . helped my business to survive during the pandemic,” she told me.

Inamori’s approach to business reflected the concept, widespread in Japan, of “three-way satisfaction” — with a company aiming to serve the interests of its customers and local community, as well as its own.

Despite Japanese companies’ tradition of looking beyond the bottom line, the country is widely seen as a weak performer among developed markets where the ESG agenda is concerned. See, for example, this assessment from McKinsey, warning that its “ESG scorecard” shows Japanese companies falling behind rivals in Europe and North America. What’s going on?

Yu Shimizu, a Tokyo-based ESG fund manager for Sparx Asset Management, said that one factor was a relative lack of emphasis on the perspective of shareholders, who are notably absent from the “three-way” framework. That may have led to weak governance standards, hurting Japanese companies’ performance on the ‘G’ element of ESG.

And while Japanese companies do pay attention to their impact on local communities, they tend to assess this in-house, rather than welcoming third-party assessments, said Kenji Fuma, chief executive of Japanese ESG advisory business Neural. The opinions from climate and human rights groups often fall on deaf ears in the corporate decision-making process, he added.

Despite these weaknesses, fund managers at Schroders argue the common view that Japan is far behind on sustainability issues “is a bit of a myth”.

Less diverse boards and less shareholder-friendly capital allocation, compared with counterparts in other countries, have driven that negative perception, said Simon Adler, an equity fund manager at Schroders. But he thinks that focus is “too narrow”.

“Attractive valuations, coupled with the strong balance sheets and Japan Inc’s sustainable approach to stakeholders, makes it an attractive place to invest for ESG investors,” Adler told me. (Tamami Shimizuishi, Nikkei)

Smart read

Here’s an interesting read from the Washington Post’s Shannon Osaka, looking at whether it is time for a strategic shift in the environmental movement. A big obstacle to the US energy transition is the regulatory “miasma” that stands in the way of badly needed green infrastructure. “And while Democrats have a bill in the works to speed that sort of permitting, most environmentalists oppose it — because it could also promote oil and gas development,” Osaka wrote.

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