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Episode 49

The Angry Clean Energy Guy on pretty much everything you need to know about ESG, starting with the need to be very suspicious whenever you see an ESG label on an investment product. 

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ESG has become a huge business, with one dollar out of every 3 professionally managed dollars in the US for example labelled “ESG” (and an even greater proportion in Europe).  The trend is clear and pretty much 100% of funds under management will have an ESG label soon. But in order for this to have a material impact in the fight for clean air, against climate change and against environmental destruction, we need global ESG standards and we need to divorce the “E” from the “S” and the “G”. Then, we need to price the “E”: Climate risk isn’t just a disclosure issue and should be priced into earnings, as should other environmental risks. Then we would have a chance to change the world.

Assaad W. Razzouk

We need to talk about ESG.

Let’s de-mystify it first.

ESG means the environmental, social and governance factors that you should use to measure the impact on society of an investment you make in a company or business.

ESG also means the environmental, the social, and the governance risks embedded in that business.

Another way to think about ESG is that it’s a tool to assess how sustainable a business is. Is it affecting the environment in material ways that are not taken into account? Does it have social issues? Does it treat its workers well? Does it use child labor? Is its governance transparent and robust? Does it have checks and balances?

In effect, ESG is everything not on a company’s balance sheet or clearly stated in its earnings.

And that is precisely the flaw in ESG.

Think about that for a moment. You have stocks changing hands every nanosecond on the stock market. You’ve got bonds changing hands. All of these securities are changing hands based on growth and earnings and other factors, but they are almost never changing hands based on their impact on the environment, on whether they are abusive to their workforce or using child labor, or whether their governance is robust and transparent.

But I’ll come back to that later in the podcast.


Let’s start though by recognizing that ESG has become a huge business. How huge? One out of every three professionally managed dollars in the US is labeled ESG, and more in Europe.

That’s $16 trillion of ESG-labeled investment just in the U.S.  You’ve got $16 trillion of equity and debt in the U.S., managed professionally, apparently taking into account ESG factors, or at least that’s what they want you and me to believe.

Out of these $16 trillion, 25% or $4 trillion are alleged climate funds. These are funds that says they are mandated to own anything in everything that supports decarbonization and the clean energy transition, but of course, fund managers can define and justify that anyway they like. For example, they can invest in natural gas companies if, in their judgment, these supports the clean energy transition, even though obviously they do now.  They can also own consumer good companies, banks, technology companies, insurance companies, et cetera, and they can label the whole thing a climate fund if they think that those companies support the clean energy transition.

Just two years ago, one out of four dollars, instead of one out of three, was labeled ESG.

Ten years ago, there was no ESG. It was non-existent to speak of.

You can see how therefore ESG today is just a massive investment trend.

ESG of course does have a long history, but it really took off five years ago. The game changer was the Paris Agreement, signed in 2015, as well as the availability of the United Nations’ Sustainable Development Goals as a framework.

ESG is also a joke.


There are no universal rules to even begin to analyze ESG risks in most companies. Think about it instead as “pretend ESG”.

Here’s one example. Deforestation is a major driver of climate change as we all know, as well as a significant factor in biodiversity loss. You would therefore think it should be a core focus for investors who want their capital to fund positive environmental effects. You would also think it’s being used as a filter to ensure companies in climate funds or in ESG funds are not turning blind eye to deforestation.  You would be wrong. Carbon Tracker, a green think tank I love, found that a huge 78% of mutual fund providers and 64% of ETF providers offered ESG investments, but not a single one of these funds specifically excluded deforestation risk. Not a single one of these funds actively priced climate risk either.

What is going on, you might ask?

Welcome to Episode 49 of The Angry Clean Energy Guy with me, Assaad Razzouk.


BNP Paribas. You’ve heard of them. It’s the world’s eighth largest bank by total assets. It operates in 72 countries. It’s the largest bank in the Eurozone. Its roots go back to 1848 when it was established as a French national bank.

BNP also never, ever loses an opportunity to boast of its amazing green credentials.

The same BNP is also the world’s worst banker of offshore oil and gas over the last five years.

The same BNP is the fourth worst fossil bank in 2020 globally.

The same BNP actually increased lending to fossil fuels since the Paris agreement was signed in the city where it is headquartered.

Here is the same BNP on sustainable investing, and bear with me, I would like to quote its website:

“Why sustainable investing? Quite simply, it is worth it. Financially, the results from investing with an appreciation of the environment, high social standards and responsible business conduct – the pillars of sustainable investing – can be attractive” . and on and on with more guff from BNP.

Would you trust that bank with your money? With one hand it’s peddling ESG products, but with the other hand, it’s fueling the climate crisis.

That BNP story, in a nutshell, is all you need to know about ESG funds and ESG investing.

You should assume it’s broadly a scam by and large until further notice.

I should say at this point that it’s not all bleak, but bear with me more on this in a couple of minutes.


But first, what is all that ESG stuff anyway?

ESG has always been with us in one form or another, though as a fringe activity.  In the 1800’s for example, religious beliefs started making their way as investment filters. In the 1900’s, you had social issues like the anti-war sentiment in terms of Vietnam or the anti apartheid sentiment in terms of South Africa. These led to investing filters as well.

But throughout that period, impact investing and socially responsible investing (terms used interchangeably today with ESG investing) were all categorized as niche. They were also deemed to be unconnected to financial or investment fundamentals, even though clearly that was wrong.

It took the Paris agreement for ESG to go properly mainstream. When 200 countries signed one agreement backed by a scientific consensus that we are going to do something about climate change, public consciousness moved dramatically. People basically woke up to the fact that if they just opened their eyes, what they might have thought of as a hypothetical risk, climate change, was now a reality everywhere around them. People by and large wanted to make a difference. And so they flocked to ESG products because as the BNP Paribas story I just told you shows, investment managers and banks gleefully jumped on the ESG bandwagon and took advantage of the desire by ordinary citizens to make a difference.  What a surprise, not!

The reason investment managers and banks were able to take advantage of our collective willingness to help fight climate change is because the ESG space is, to put it mildly, a complete zoo. For example, the scale of adoption of ESG considerations among investors is swimming in confusion. As another example, ESG factors don’t have proper definitions that are consistent across the world, or proper standards of measurement that are comparable across the world. The terminology is also confusing, complicated and unclear.

Remember ESG is there in order for investors to make sustainable investments. But obviously if it’s a complete zoo, you can safely assume that is not what is going on.

Let me give you an example. Morningstar Inc. identified 253 funds that switched to an ESG focus in 2020 in the United States. Out of these 253 funds, 87% of them rebranded in the process by adding words such as “sustainable” or “ESG” or “green” or “climate” to their names to highlight the fact that they’re now ESG funds. Now you might ask how many of these funds changed their stock or bond holdings as a result? I’ll tell you how many: Zero.

That’s “ESG Washing” for you.


There is some good news. Lots of good people are actually trying very hard to do something about this, about the fact that banks and investment managers are basically taking advantage.

There are at least five different ways this is happening.

First, several leading ESG standards organizations – basically voluntary NGOs that have issued ESG standards – are trying to collaborate so that there is less confusion in that space and that’s desperately needed because what we need is basically one ESG framework, not 500 frameworks that people can arbitrage.

Second, the International Financial Reporting Standards Foundation is also finally, possibly 30 years late, developing ESG standards. The way I think about the IFRS Foundation is that it’s the Pope basically for the global accountancy profession. It develops the globally accepted accounting standards that accountants apply when they review and sign-off on financial statements. Because 120 countries use these IFRS standards as the foundation for disclosure in financial statements, adding ESG standards through an edict by the Pope of that profession will probably have a global audience. That is a very good thing.

Third, Europe introduced in March – so just a few days ago – rules that will police investment products. That means that over time, these rules will basically force asset managers who want to say that they are marketing ESG products or sustainable funds, to go through tough disclosure requirements. And that’s because Europe wants to empower European investors and citizens to make clear decisions about their money – because it’s clear at the moment that they cannot. So the EU is putting additional pressure on asset managers, banks, insurance companies and pension funds to themselves become more sustainable, but also more transparent. The EU is also forcing them to disclose how they incorporate ESG goals and ESG frameworks.

Fourth in the department of encouraging news is that the UK is also working on introducing new ESG disclosure requirements for investment managers.

Fifth and probably most importantly, the U.S. SEC is also on the case. Earlier this year, it laid out an ambitious agenda promising to make environmental, social and governance issues central to its mission. That is extremely important because these should be part of almost every financial transaction.  The U.S. SEC, given that it supervises the largest securities markets in the world, can actually make it happen.

So it’s not all bad. At the very least this is progress, but at the same time, you have to keep in mind that our regulators have made it difficult for us to be optimistic. The very same U.S. SEC, for example, issued guidelines in 2010 – that’s 11 years ago – on climate disclosure, then these guidelines were promptly ignored and the SEC itself appeared not to give a toss. So it’s not all bad, but at the same time the regulators have to deliver.


There is another major challenge out there. Everything I’ve just described are just disclosures and reporting rules: Information that companies have to put together and disclose. Environmental information will include things like their air pollution, their climate change footprint, the biodiversity and habitat impact of their business, whether they deal in contaminated land, whether they’re responsible for discharges of dirty water into our rivers.  Social disclosures will cover the risk of employing child labor for example, or of facing major health and safety issues. On the governance side, they’ll have to state whether the board has ESG oversight, disclose proactive information about any bribery and corruption risk in their business, conflicts of interests, cyber security, and the like.

But that’s just disclosure, information and reporting. And what’s going to happen? The brightest brains in the world, most of whom work at companies, at banks and at investment management firms, will find a way to put together absolutely gorgeous ESG disclosures. And then they’ll stay focused on what is actually driving their own personal earnings and wealth, which is results and stock prices.

That’s despite the fact that what is needed right now is nothing less than to change the world.


To put it simply our current level of emissions would make much of the planet uninhabitable if it continues unchecked. ESG can definitely play a role, but I think we need to recognize that the “E” in ESG, so environmental factors, are quite different from the “S” and the “G” and in particular, the “E” needs to be priced.

In other words, your environmental impact as a business should flow through your income statement and affect your earnings because otherwise your earnings are wrong. And that is the key problem today.

Take climate change as an example. It’s different from everything else in the “S” and the “G” because it impacts physical assets and often results in direct costs. For that reason, because it’s a macro risk, all companies in all sectors hold assets that are at risk in terms of climate change. These risks are not priced-in. Take a look at AT&T for example, the U.S. telecom company. Natural disasters linked to climate change cost AT&T about a billion dollars since 2016. Where were these in the financial statements before 2016? They were nowhere. As a result, there were material omissions from its financial statements in 2015, 2014, 2013, because it never bothered to assess the climate risk its operations faced and take financial provisions accordingly.

That’s just one company and a billion dollars.

As another example, this time of an extreme weather event, consider the California wildfires which alone racked up economic costs of $20 billion in 2020 in direct costs. Had companies been assessing climate risks, they would have taken provisions based on some scientific modeling to prepare for all these natural disasters that we knew (and they knew, or should have known) were coming. Meanwhile, where is all that in the financial statements, the balance sheet, the income statements, the earnings of companies? Well, it’s nowhere.

Almost every single company has an exposure to climate risk, whether directly or via their customers, their suppliers, or other stakeholders, but don’t take those risks into account. They are invisible and their earnings, in other words, are inflated. They’re wrong.

In fact, the entire math underpinning global stock markets is wrong and here is what needs to get done.

As I said before, we need to divorce the “E” from the “S” and the “G”, and we need to price the “E”.

What good is it to have a disclosure that says there is a risk of pollution from my business, from discharges to waterways, including groundwater that will pollute your drinking water? What good is that disclosure? What we need instead is a provision that the company running that risk takes against its earnings in case it messes up, and we then need to decrease that company’s earnings by that amount and change its valuation, unless it never discharges into waterways and dirty our drinking water.

Governments and regulators designing ESG disclosures need to take the “E” out and force companies to price it.


Personally, I’d like to see new style research firms issuing, at a minimum for the 1,000 largest companies in the world, restated earnings, showing the actual profitability of these companies, if they were paying for their pollution.

For example, you would take their greenhouse gas emissions and you would put a carbon price of $50 or a $100 dollars on these because that’s how high the carbon price needs to be to speed up the transition to a zero carbon world, then show what the actual core profitability of that company is. Because otherwise, the very same company emitting all these greenhouse gases is polluting at will and not paying a penny for that pollution. And that’s just greenhouse gases. Methane pollution should be computed, and then earnings should be charged against it. Other greenhouse gas pollution should be priced. Then local gases that pollute the air we breathe should also be priced. Then every car manufacturers’ stock price would suffer except of course, those manufacturing electric cars.

You’d also price, deforestation impact, and many other environmental factors.

If we did that, we would see in a nutshell that the absolutely overwhelming majority of companies are putting out right now, today, wrong numbers. Their financial statements are materially misstated.


And now let’s talk about BlackRock, the world’s largest asset manager. According to its CEO, climate risk is investment risk, but what did BlackRock actually do about it? Surely they have the research muscle to restate company earnings and then invest on that basis. But no, they didn’t bother. They said the right things – I mean, what they said was beautiful. Then then they continued doing the wrong things, and that should make you angry.

Fighting climate change effectively and decisively is not about your plastic straw. It’s about forcing companies to price environmental destruction. In the case of that plastic straw, we need to show the money companies get from selling it in revenues, which we already do. We need to show how much it costs to manufacture in expenses, which companies already do. But most importantly, we need to show its environmental footprint and its pollution in expenses as well. And do you know what would happen? Then plastic straws will be exposed for what they are: Poison, and loss-making at that. And they would then just simply stop being manufactured.


Until we start moving in that direction, when you hear ESG be skeptical, be very skeptical.

Give a hard time to anyone running around with an ESG investment product.

Take a good, deep look at what’s in that ESG fund.

Ask probing questions.

Do the work until you’re satisfied it is not a fig leaf for earning fees off of our propensity to trust capital markets that frankly, and sadly, have become untrustworthy.

What is good is profitable.

What is sustainable environmentally is sustainable economically.

Acting in the public interest is acting to maximize the bottom line.


We don’t want ESG to become the third plank in a sophisticated triangle of deceit, together with “net zero” and voluntary carbon markets. I covered “net zero” and voluntary carbon markets in the previous two episodes of The Angry Clean Energy Guy, that’s episodes 47 and 48.

This one is focused on shouting about ESG from the roof.

ESG is important, but needs to be done correctly. And this thing is actually really, really big. A recent survey showed that 77% of institutional investors planned to stop buying non-ESG products. The trend is clear: Pretty much 100% of funds under management will be labeled ESG soon.

But if this is actually to have a material impact, and remember we are in a hurry, we don’t have time, we need global ESG standards. That is necessary. Absolutely. But it’s not sufficient.

We also need to divorce the “E” from the “S” and the “G”. Environmental impact must be priced. Social and government factors should be disclosed. If environmental impact is priced, earnings will change. And as you heard, the best way to think about that is when you look at a company’s earnings, look at their CO2 emissions, look at their methane emissions, ascribe a carbon price on that, deduct that from their earnings, and then you would see a better reflection of the actual money that they’re making, because you would have priced their pollution and they would have paid for it.

If corporate earnings change, everything can change.

Meanwhile, remember the earnings that you see that are driving stock markets, that are driving bonds, do not reflect the environmental impact of pretty much any business.

All of them are running around capitalizing profits and socializing environmental losses.

I would really, really love to see new style research firms funded and launched that focus on restating the earnings of the world’s biggest 1,000 companies to price in their “E” and show their true colors.

On that note, thank you so much for listening to this Episode 49 of The Angry Clean Energy Guy with me, Assaad Razzouk.

If you like the show, please remember to rate, to share, to review and have a great couple of weeks.

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About Me

There is so much to be angry about, if you are a clean energy guy.

Every day, so many things that happen around the world make me angry when I look at them with lenses colored by the climate change chaos unfolding everywhere around us. And I am especially angry because I know we can solve the climate change crisis if we were only trying.

Each week, I will share with you a few topics that struck me and that I was very angry about – and this will generally have to do with climate change, solar or wind power, plastic pollution, environmental degradation, wildlife, the oceans and other related topics.

Assaad Razzouk

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