Mark Dampier: HSBC’s Stuart Kirk was spot on about ESG

In 1984, Friends Provident launched the first ethical fund, surely the forerunner of the ESG movement today. I remember much emphasis on the fact that by buying companies that put high ethical standards first, you would outperform the market.

I don’t have any more recent statistics about the fund and whether it is still going, but I do recall looking at it after 25 years and seeing that it hadn’t matched the FTSE All-Share index, which seems to satisfy the long-term test.

Of course, for the financial sector, it started a whole new sub-industry, as more funds were launched. You had firms that screened for ethical companies and advised on both negative and positive traits. We had different types: light green; dark green; ecology; environmental. All would screen out different companies, so some might include oils, others not — a total minefield.

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Today, it all seems to come under the label of ESG. As you might expect you can’t move for consultants telling you what you can and can’t buy. Each one reinforces their existence with more rules and tick boxes. They now find themselves in positions of real power, as they end up dictating the actions of the asset management companies.

There is nothing intrinsically wrong with trying to find companies that act for the greater good and have sustainable business models. It is a bit like buying quality companies. When I used this quality label in writing at Hargreaves Lansdown, Peter Hargreaves use to remark: “So lots of other fund managers look to buy rubbish companies then?”

The trouble, as ever, is that when you start trying to categorise companies into good and bad, it is not easy. For those who can remember, John Major’s Back to Basics campaign in the 1990s was a disaster. Trying to dictate moral values usually becomes badly unstuck.

Trying to exactly define goodness becomes somewhat difficult. No investing in defence companies is understandable until you need weapons to defend the very ideals you wish to keep. What could have happened in the 1930s if RJ Mitchell, inventor of the Spitfire, had been refused funding?

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And now we have Russia’s invasion of Ukraine. How do we rate Chinese companies after this? They may tick the right boxes in one sense and entirely miss the big picture that the Chinese regime isn’t any better than the Russian. I see the ESG defence debate has sparked an argument on the difference between defensive and aggressive weapons. I’m sure the Ukrainians whose territory has been invaded must be debating this while shells rain down on them.

This brings me to poor Stuart Kirk, head of responsible investing at HSBC, who has caused outrage, especially on Twitter, by daring to question actions on climate change. His comments struck me as being spot on. Climate change has become a trillion-pound industry spawning more hangers-on, think-tanks, green publications and pressure groups than surely any other industry today. All have a vested interest in keeping the status quo, so they strongly dislike people raining on their parade.

What Stuart Kirk was surely saying was that, in terms of risk, we can take action to reduce climate change, but we can’t know for sure whether it will work. While spending trillions on trying to make these changes, the likely temperature change is tiny without countries like China and India acting now. So surely we should look at adapting far more than mitigating?

Danish author Bjørn Lomborg has long been an advocate of adaption. His book False Alarm espouses much of this. Kirk’s comparison of Amsterdam and Miami’s flood defences was more out of the Jeremy Clarkson stable than a huge corporation’s, but it did rather make the point.

The problem we have today seems the inability to talk about difficult subjects and to challenge the consensus. It has left us with an NHS struggling to provide a service and an energy policy that isn’t fit for purpose.

Isn’t it ironic that the fund management industry, where great managers have the ability to think more laterally, is being steamrolled into an ESG bandwagon? But then, an industry that now has £2.7tn of assets under that umbrella has a tendency to do that.