The Ever-growing Importance of ESG: BlackRock and Audi

In today’s post, we shall examine a concept that we have examined a number of times before here in Financial Regulation Matters, and that is the concept of ESG, or more accurately the integration of ‘E’nvironmental, ‘S’ocial, and ‘G’overnace concerns in relation to business. Today’s post focuses on two stories in particular, and uses them as a vehicle for examining some merging debates around this ever-growing sector.

We looked over the summer at the story that Nissan had admitted to falsifying some of its emissions-related data, which naturally should lead us to think of the sector-defining Volkswagen scandal, a scandal which will leave a massive mark on one of the industry’s powerhouses. In line with those developments, Audi was fined €800 million last Tuesday for similar transgressions, ranging from 2004 to 2018. There are, of course, a number of issues and variables that are affecting the auto industry at the moment, but for our discussion surrounding the concept of ESG, it is clear to see that for an investor, ESG is important. We are seeing that, due to environmentally concerned regulations, large corporate entities are at risk and, as such, so are the investments of the institutional investors who facilitate the movement of capital. Audi’s punishment, when combined with the massive penalties felt by VW and the potential penalties that will be given to Nissan, serves as a reminder to investors that they really ought to consider ESG within their investing decisions. If we look to the business media, there is a story today that suggests that this message has been received loud and clear.

BlackRock, one of the world’s leading investment vehicles, has decided that it needs to be at the forefront to the ‘sustainable finance’ revolution. Speaking yesterday, Larry Fink – Chairman and CEO of BlackRock – stated that his intent is for BlackRock to become a ‘global leader’ in sustainable investing, and that ‘sustainable investing will be a core component for how everyone invests in the future’. He continued by discussing his view that, for exchange-traded funds (ETFs), those that incorporate ESG factors will grow from $25 billion to $400 billion within a decade, which provides us with an insight as to the rate of development that BlackRock foresee in this area. Interestingly, he also discussed the changing mentality when it comes to sustainable investing practices, noting that ‘we are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher’. This is interesting as, based upon the discussions we have had regarding the PRI initiatives, it very much appears that sustainable finance is irreversibly heading towards the ‘mainstream’. There have been questions that have been raised as to whether sustainable finance can maintain its ethos, and ultimately its impact, if it becomes mainstream, but it is safe to say that it will be considered mainstream very shortly; news recently that Barclays are extending studies into the effect of ESG upon credit portfolio performance, only enhances this suggestion. Furthermore, leading figures within JP Morgan suggest that whilst there are some parameters left to develop, namely that definitions need to be agreed upon, the development of ESG incorporation into mainstream investment practices is seemingly irreversible.

Ultimately, the penalties received by Audi and VW serve as clear indictors as to why the incorporation of ESG will become a mainstream investing practice. For large investors, it is just too evident that ESG concerns, particularly in relation to both environmentally-concerned regulations and also the importance of ‘G’overnance within the modern corporation, will affect their investment in some form, and at some point. Some investors, of course, will be lucky and avoid having their investment affected by these issues, but for many investors that risk will be far too high. The expected outlay in research and the necessary quantification of ESG-related issues will move the incorporation of ESG irreversibly into the mainstream and, if all parties submit to that approach and the ideal of internalising a long-term vision, then the financial sector will surely be better for it. It is, unfortunately, when entities do not internalise that ideal that the sector, and society as a result of the interconnectedness of the two spheres, that we are all put at risk.


Keywords – ESG, Investing, Business, Auto, Audi, BlackRock, @finregmatters

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