City turns its back on ethical investing as geopolitical upheaval removes its shine
Matt Oliver
6 min read
Unilever ESG
Finding social purpose for Knorr stock cubes or Walls ice cream was always going to be a tall order.
Now, Unilever – the self-appointed torchbearer for ethics in the City – has thrown in the towel.
“For some brands, it simply won’t be relevant, or it will be an unwelcome distraction,” Hein Schumacher, the company’s chief executive, said on Thursday.
“Not every brand should have a social or environmental purpose.”
The about-turn follows mockery and investor discontent over the consumer goods giant’s vow to find a social mission for every one of its brands – even Hellmann’s mayonnaise.
Unilever’s policy change is symbolic of a wider shift in the City: investors are focusing less on trendy ESG (environmental, social and governance) metrics and more on old-fashioned profits. Those who fail to respond to the shift will be punished.
Unilever, which also owns Dove soap, Marmite spread and Ben & Jerry’s ice cream, is not the first to scale back its ESG commitments.
British oil majors Shell and BP have refocused on their oil and gas efforts after investor frustration with the cost and lack of profits from renewable energy pushes.
The scandal ignited a firestorm that led to the resignation of Dame Alison Rose, NatWest’s boss, and an industry-wide review into so-called “debanking”, with critics holding up the saga as more proof that companies should virtue-signal at their own peril.
“There has definitely been a rowing back on ESG,” says Ashley Kelty, head of oil and gas research at Panmure Gordon.
“I think it’s a case of people wanting companies to stick to what they are supposed to be doing, not agitating for various causes that have nothing to do with their core business.
“Shareholders are saying: ‘We don’t care which causes you support. We want to make money’.”
Minds have been sharpened by a series of global crises: soaring energy costs, surging inflation, rising interest rates, the war in Ukraine and a newly destabilised Middle East.
These shocks are calling into question the idea that supporting companies with worthy goals is really the best use of money.
ESG funds suffered their worst ever month for withdrawals in May as market turmoil swirled. Investors pulled £304m out of sustainable funds in the sector, as a surge in gilt yields pushed investors to overhaul their strategies and chase higher returns.
It is a trend that will only become more pressing as rising interest rates make bonds more attractive relative to stocks. This will force investors to be even more discerning about where they put their money.
As they pour over the data, they are likely to find little evidence that ESG leads to the bountiful returns some disciples have promised.
Supporters have long claimed that applying ESG principles to a business is not only ethical but will result in a better-run, more competitive company that can deliver stronger returns for shareholders.
But according to a study published this month by Scientific Beta, an index provider that was started by the Edhec-Risk Climate Impact Institute, there is scant proof of this.
They found the returns from ESG investing were generally no higher than those from standard funds – and were even slightly weaker.
The study also argued that periods of strong performance, such as in the year of 2020, should be seen as outliers rather than exemplars.
“For investors looking to integrate ESG objectives in their investment process, it is crucial to question what impact this would have on their portfolio’s financial performance,” said Felix Goltz, one of the co-authors.
Then there is the problem of “greenwashing”. There are varying (and sometimes conflicting) definitions of what constitutes sustainable investing, prompting claims that some are simply using it as window dressing.
Stepping into the debate can attract criticism from all directions.
Larry Fink, the chief of investment giant BlackRock, recently eased up on his own climate crusade after a backlash from both the political left and right.
His annual letters to chief executives in 2020 highlighted the need to give climate issues equal standing with financial considerations.
But activists accused BlackRock of not doing enough, fast enough, to divest from fossil fuel businesses, while Republican-led states in the US pulled their pension cash from his company’s funds in protest, accusing Fink of adopting “woke capitalism”.
Larry Fink, the chief of investment giant BlackRock, recently eased up on his own climate crusade after facing political backlash - Krisztian Bocsi/Bloomberg
“When I [wrote] these letters, it was never meant to be a political statement,” he added.
At the same time, companies are facing demands from hard-nosed investors to deliver stronger financial results.
BP trumpeted investments in solar power and electric vehicle charging under former boss Bernard Looney. However, executives have faced tough questions about the returns from clean energy compared to traditional oil and gas.
Scrutiny has intensified as US rivals such as Chevron and Exxon Mobil have doubled down on fossil fuels – and made huge profits to boot.
In recent months, that has prompted Wael Sawan, Shell’s new boss, to scale back his company’s green commitments. Analysts believe BP could soon follow suit following Looney’s departure last month.
Some big institutional investors in Europe remain supportive of ESG principles, notably Norway’s sovereign wealth fund, Norges Bank, which has warned companies to ditch their green mantras at their peril.
Guy Jubb, an honorary professor at the University of Edinburgh, and the former head of stewardship and governance at Standard Life Investments, believes it is short term political trends that are creating “a permissible environment for companies to take their foot off the purpose pedal”.
He believes investors should be concerned by Unilever’s “sustainability-lite” statement on Thursday, adding: “Tone from the top is critical. In the long term, shareholders and society should not tolerate a lack of priority on sustainability and purpose. The stakes are too high.”
For now, Unilever insists that its change of course does not represent a retreat.
“Are we giving up on purpose-led brands? The answer is no,” says Schumacher.
“When it’s logical, I will continue to encourage that. However, I also believe a social or an environmental purpose is not something that we should force fit on every brand.”
Salads and sandwiches are a less glamorous calling for Hellmann’s mayonnaise – but they are certainly a more straightforward one.
