Hiring ESG talent is all well and good — it's what you do with it that counts
Banks and asset managers must listen to their sustainability experts on complex issues
Some observers have questioned whether the sustainability talent being hired by capital markets firms is just window dressing. Whether they are right to be doubtful depends on what happens after the new employees join the firm.
Until recently, banks relied largely on experts trained in-house to advise clients on their green bond programmes and market them to investors. Self-taught specialists like these have done a great job of creating a completely new market from scratch.
But now financial firms have started to realise they need deeper knowledge of environmental, social and governance topics — or at least, they are under pressure to look like they have it.
The resultant frenzy among banks and asset managers to hire armies of ESG experts has been remarkable. But it has also drawn the attention of sceptics, who wonder whether it is the result of a real concerted effort to clean up finance or merely a new form of marketing.
The critics point out that, for an investment bank, a sustainability expert from the consultancy, NGO or education sector may seem relatively inexpensive.
But the real test will be to see whether bankers listen attentively to what their new ESG colleagues have to say.
Oil's well that ends well?
Some ESG decisions are relatively easy to make. Pulling out of oil, natural gas and coal are no-brainers from a climate point of view.
But as sustainable finance evolves, the issues are going to become more complex and may require more time and detailed attention than a transaction-focused banker can afford to give.
Take carbon capture technology, which is being developed with the aim of sequestering carbon dioxide either from the air or from the point at which it is emitted — a coal fired power plant, for example — and storing it somewhere safe, such as an underground cavern, or used for some innocuous purpose. It sounds like a great idea and could be a game changer if it works at scale. It may be especially useful in hard-to-decarbonize industries such as cement.
However, carbon capture is a highly divisive subject.
Some see it as an essential step in the journey to net-zero emissions. The International Energy Agency, for instance, estimates there needs to be a 190-fold increase in carbon capture capacity by 2050.
But other groups, such as the campaigning organisation Greenpeace, see it as a false hope. Greenpeace says there is a lack of evidence that carbon capture and storage offers a sustainable climate solution, given the challenges in bringing the technology to maturity and scaling it up.
NN Investment Partners, the Dutch asset manager recently acquired by Goldman Sachs, voiced concern about potential "over-reliance" on unproven technologies such as carbon capture, use and storage and so-called "blue" hydrogen in the context of the UK's green bond framework, only giving green Gilts a "benefit of the doubt green label" after the UK provided assurances that carbon capture, use and storage and blue hydrogen projects would account for less than 10% of the proceeds.
The uncertainty has led even some who are directly involved in financing carbon capture to question what they are doing.
"I'm a little worried about it, because if it works — great. But it does tend to perpetuate fossil fuels," a source recently told GlobalCapital. "And it'd be really nice to get rid of them, if you care about the climate."
Is carbon capture the answer to all our problems? At this stage, nobody really knows. But relying on a moonshot is probably not the most sensible option.
To successfully navigate the complexities of this and other thorny ESG topics, banks need to make sure they are not just bulking up on sustainability experts to look good, but take them seriously too — even if they are not paid as much as other bankers.
This is especially important for all those in senior leadership positions. Bankers lower down the ranks take their cues from those above them. If they sense that their bosses' commitment to ESG topics is purely cosmetic, they will behave accordingly.