Big Tech's Big Reckoning

27 Nov 2022 | COP27 post-mortem. Biodiversity's 'Paris moment'. The $4M greenwash bill. Plus, FAANG sustainability faces scrutiny.

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🌡️ Post-mortem reflections on COP27 are in. Reasons to celebrate: The hard-won victory by small island states to set up a new fund for “loss and damage” resulting from climate change. Reasons for concern: Little progress — beyond that which had been decided at COP26 — towards keeping 1.5°C alive. The final decision text was conspicuously absent any agreement to phase out fossil fuels, without which it will be virtually impossible to halve carbon emissions by 2030. This year was marked by a shift in focus from mitigation to adaptation, underscored by an acknowledgement (if unspoken) that 1.5°C is “on life support.” On the one hand, as we wrote earlier this month: If 2°C or more is irreversible, the conversation has got to evolve from existential abstractions to high-stakes realism. Relative to lofty pledges, adaptation has been critically overlooked and underfunded. On the other: The controversial ‘phase out’ proposal was vetoed by a coalition of fossil fuel-producing countries led by Saudi Arabia, with one delegate reported to have said “we should not target sources of energy… [or] mention fossil fuels.” It makes any 1.5°C obituary feel less pragmatic and more, I don’t know, purchased? Hope for more ambitious progress rests on COP28 in Dubai, barring which, there’s always the option of distraction courtesy of FIFA.

🦣 Next up: Biodiversity in Montreal, where the UN Biodiversity Conference (COP 15) begins in December. Organisers hope to finalise the Post-2020 Global Biodiversity Framework, stylised as the ‘Paris moment for nature’. “Paris — or Copenhagen,” cautions Carlos Manuel Rodríguez, CEO of the Global Environmental Facility. The 2009 Copenhagen summit failed where the 2015 Paris summit succeeded, in part because the latter ignited an unexpected explosion of innovation and decarbonisation. Implicit in the ‘Paris moment for nature’ is an urgent hope that the private sector throws its weight behind biodiversity with the same gusto that drove climate to the top of the business, investment, and political agenda. Plenty hangs in the balance. In its latest flagship publication, The Living Planet Report 2022, WWF revealed global wildlife populations have plummeted 69% since 1970. Despite a 2010 pledge to halt a 2.5% annual decline in animal loss, extinction has marched on at the same pace in the intervening years. Fortunately, the biodiversity investment and disclosure landscape is growing — the TNFD recently released a third draft of its beta framework — but Will Goodhart of the CFA tells investors to learn from the mistakes of ESG: More focus on real outcomes; less trying to be “all things to all people.”

💸 Elsewhere, coordinated regulators continue to plug away. The FCA is developing a Code of Conduct for sustainability data and ratings providers, as Bloomberg reports that fund managers are finding alpha among the ‘artificially low’ scores of emerging market companies overlooked by traditional providers. (N.B.: Util has no such bias!) ESMA, which launched a review of the data landscape earlier this year, is now seeking feedback on its draft guidelines for fund naming conventions. The rules will establish a quantitative threshold for funds claiming to be ‘ESG’, ‘sustainable’, etc. ESMA has proposed that qualifying funds demonstrate 80% holding adherence to sustainability criteria, which aligns with the threshold set out by the SEC. “The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims,” says ESMA in its press release. In other news: The SEC has fined Goldman Sachs $4M for rebranding as ESG some non-ESG-looking funds, following an investigation it opened in June. Defection from the EU’s ‘greenest’ fund category continues unabated, with asset managers citing confusion about requirements. Amundi, Europe’s largest asset manager, announced plans to downgrade the majority of the €45B it holds in Article 9; DWS, five SDG-themed funds worth €2B; and HSBC, a smaller pool of seven funds.

Big Tech’s Big Reckoning

For a long time, the sustainable investment mantra “doing well by doing good” owed much of its success to FAANG stocks: Meta-owned Facebook, Apple, Amazon, Netflix, Alphabet-owned Google, and now Microsoft (making it MAGMA? MAAMA? Spare a thought for the sub editors who launched 22,000 'bite' puns and are left now with only Apple.).

The clutch of low-emitting Big Tech firms were a “fast fix” for the environmental objectives of ESG investors, reports Bloomberg. They tilted heavily towards — and reaped the outsized returns of — a sector buoyed by low borrowing costs and high risk appetites. Then came aggressive volatility, inflation, and interest rates, which took the teeth out of FAANGs, the fire out of MAGMA.

In January, we predicted an industry downturn would prompt well-timed scrutiny of its hitherto celebrated ESG credentials. (In a similar vein, as discussed by CEO Patrick Wood Uribe both here and here, this year has seen sustainable investors pivot on weapons and fossil fuels just in time to take advantage of higher returns, which lends credence to the argument that ‘doing good’ is ’doing well’.)

To be fair, scrutiny is overdue. For two decades, tech companies — shielded by mysticism — have been managed, engaged, and regulated with relative laxity, prompting unheeded calls to tame the tech titans. The bear market shakeout put an end to that, dispelling blind faith in both Silicon Valley and the Silicon Valley-tilted market indexes onto which many a ‘sustainable’ sticker has been slapped.

Beyond schadenfreude, there are a couple of reasons to pay attention to Big Tech’s Big Reckoning. Just as it became the token sector of (and eventual proxy for) sustainable finance on the way up, their respective battles are symmetrical in a cyclical downturn. Or, as Protocol put it: ESG’s struggles are Big Tech’s problem; and Big Tech’s struggles are a sustainable investor’s problem. Both must fight fires from two angles, with one set of accusations justified (‘offshoring’ negative impact; poor governance; absent regulation; even antitrust — all reasonable), the other, less so (‘woke’ culture; free-speech/market censorship — clearly political). The former must be confronted, the latter, discredited, which is a tricky tension to navigate.

Babies and bathwater

For Big Tech as it is for BlackRock, the priority (and challenge) is to protect the concept while repairing trust in the execution. It is against ‘governance’ metrics, such as management, risk, and regulation, that the tech industry falls short. In terms of impact, however, the positives are frequently overlooked.

Microsoft product impact relative to the 17 SDGs, Util data

Take Microsoft (above). Through the direct sale of its products and services, the company turbocharges sustainable development. Computer hardware and software have transformed education globally (SDG 4). Digital adoption lowers barriers to Internet access, boosting literacy and academic performance in rural regions. The shift is one of both function and form. ‘Any time, any place, any pace’ information engenders democratic, collectivist, collaborative learning. Innovations have catalysed similar leaps in healthcare quality and access (SDG 3) and food production and security (SDG 2), not to mention innovation, efficiency, and productivity (SDGs 8 & 9).

Even against gender equality (SDG 5) and global partnerships (SDG 17), Big Tech, on the whole, scores well — perhaps surprisingly so, given negative perceptions about social media in particular. Nonetheless, aggregated academic consensus associates it with higher adoption of healthcare and contraceptive access among women, as well as equal rights and freedom of speech generally.

As sustainable investing evolves, the ‘good vs. bad’ binary against which companies were once evaluated looks less relevant. It grows harder to justify bundling E+S+G factors — particularly across both operations and externalities — into a cute score. Instead, argued the CFA’s Will Goodhart, exercise discernment and get comfortable with nuance: Though sustainable investing cannot be “all things to all people,” it can have real impact.

In short, the world is complicated. (The argument for conglomerates paying tax is not.)