Why should we choose among ESG criteria?

Source : Les Echos

Let’s take an example from the outset: blast furnaces require a lot of energy, so they are potentially very polluting, especially with an energy mix composed mainly of fossil fuels. In addition, the relocation of this type of industry to countries that are not necessarily democracies leads to risks of controversy about the working conditions of employees incompatible with our European standards…

These same blast furnaces are fed with metals by the mining sector, itself subjected to complex constraints. It can represent a strong degradation of the environment and biodiversity, through land use and chemical pollution. And all mines located in OECD countries or even worse, outside the OECD, also do not guarantee social standards in accordance with our requirements.

Focus on essential activities

However, blast furnaces and mines are essential to power railway infrastructure, wind turbines, solar panels… and therefore, to develop solutions that reduce our dependence on fossil fuels.

Let’s now take the case of a cosmetics company, which designs an anti-wrinkle cream with ingredients from organic farming and light chemistry, all packaged in a jar made from biodegradable rice paste.

His proposal respects rigorous specifications, respects demanding social and governance standards: it meets the criteria of the Sustainable Development Goals. However, it participates in a consumer-oriented system and contributes nothing to the challenges of the energy transition, with the exception of its competition with less virtuous companies.

A compass that leads nowhere

The framework that defines ideal responsible finance exists: it is finance that complies with the 17 articles of the SDGs (Sustainable Development Goal) and the broadest ESG criteria. However, respecting a regulatory framework is a good thing, but cannot be enough.

Because today, these criteria represent a stack of insatiable expectations. They evolve as environmental knowledge, our societal transformations and our cultures progress. Their list is potentially limitless to draw up the robot portrait of the ideal company, which respects both man and nature.

Result: responsible finance is similar to a compass that indicates all directions at once. A compass that leads nowhere.

Not all criteria are of equal importance

It is striking to note that companies that try to meet all the criteria are those that have the least physical constraints, and the least environmental issues: we can therefore accuse them of greenwashing because it was enough for them to green their communication with a few recipes.

Those with heavy physical criteria and strong environmental issues, on the other hand, must focus on only part of these criteria. They can also be accused of greenwashing because they will always be imperfect, insufficient, and, in fact, polluting.

If the ESG criteria are all as honorable as each other, not all have the same importance, the same weight in the face of the primary issues. If the climate gets excited, everything will be destroyed. If energy is lacking, nothing can be produced. How to choose, then, a desirable mining company? Responsible blast furnaces?

Driving companies on climate-energy issues

Among mining actors, some are more virtuous than others in a sector that is intrinsically polluting. It is a question of encouraging them, or even forcing them in the best possible direction on social and environmental criteria, rather than financing companies that are irreproachable on ESG criteria, but which are not driving forces on climate and energy issues.

To have a strong impact on crucial energy and climate issues, low-contributory and non-essential sectors are inefficient. Prioritizing ESG topics is the condition for composing coherent investment portfolios.

This positioning brings its share of moral questions. Essential sectors are polluting, but really improveable. And many sectors that make real and sincere efforts are not essential. There are no easy answers, convertible into a label and ready for consumption. You have to choose your fights. What do you want to invest in?