HSBC’s behaviour smacks of censorship – not a good look for a bank that has recently been asked by US politicians to explain its actions in freezing accounts of Hong Kong pro-democracy activists. But it highlights a broader problem.
The former head of an investment firm recently told me that he had serious concerns about whether applying non-financial environmental, social, and governance factors to identify material risks and growth opportunities would either provide superior returns or help drive positive change.
He admitted that he could never air those concerns publicly as his board would have eaten him alive. That’s because ESG has become one of the most powerful marketing tools the financial industry has ever stumbled upon.
Money held in sustainable mutual funds and ESG-focused exchange-traded funds around the world increased by over 50pc last year to $2.7 trillion, according to Morningstar. There are armies of index providers, advisers and consultants charging fees off the back of these assets.
So this is not just about one guy’s job or one bank’s hypocrisy. We know free markets are inefficient because they keep getting things wrong. But they are still, in the words of the author and advertising executive Rory Sutherland, “the greatest problem solving mechanism ever devised”.
Indeed, to function properly, they must be allowed to go wrong. The route from defining a problem to finding a workable solution rarely plots a straight line. Capitalism’s greatest achievements tend not to be pre-planned and are only ever obvious in retrospect. They are usually arrived at via myriad dead ends, trial-and-error, unconventional thinking and a not insignificant amount of luck.
And yet ESG often gets dangerously close to professing a single true path. Nothing could more clearly demonstrate the intellectual deficiencies and slender foundations of this orthodoxy than its inability to brook challenge or debate. More importantly, it’s hard to think of a more certain route to failure than a one-eyed, monomaniacal focus on an unvarying set of preconceived values that scares everyone into conformity or silence.