One of the most disturbing developments on Wall Street in recent years is how the "green cult" has managed to infiltrate the culture, forcing firms to drum up ESG-branded offerings or risk losing clients to better-prepared rivals.
But like any other fad, the shift to ESG, and the pressure investors are putting on "dirty" oil and gas companies (not to mention coal) has had side effects that are more serious, and others that are more or less benign.
In the "serious blowback" camp is the fact that the backlash against traditional energy companies and the new orientation in Washington has helped drive inflationary pressures to their highest level in 3 decades (more on that here) by weighing on US supplies of crude oil.
The truth is there simply aren't enough truly "green" assets to go around, which is why Wall Street is scrambling to label any old company "green" based sometimes on little more than promises.
Just look at the top holding of two of Wall Street's biggest "ESG" funds.
Who knew Apple and American Express were paragons of carbon neutrality?
Above all, "green" bonds are supposed to create new incentives for borrowers by allowing companies that meet "green" requirements (at least on the surface) to issue debt and borrow money at slightly lower rates. But this also presents serious risks of mis-pricing.
The universe of ESG has grown so fast that it now encompasses 33% of total US assets under management.
Not everyone is okay with this rapid advance - even some of those who stand to profit from it.
Critics include senior officials at banks that are deeply involved in the business. Danske Bank's top "ESG" banker spoke to Bloomberg a few days ago about the risks inherent in the explosive growth of ESG-branded assets, especially loans and bonds. The banker, Samu Slotte, warned about an epidemic of "greenwashing" in the global asset management industry.
There are "clear risks" as things stand now, he said. "There is room for improvement."
But one banker's lack of self-awareness isn't stopping Danske Bank from engaging in some ESG-related skullduggery of its own. The bank just announced plans to 're-categorize' the vast majority of its funds, lumping them into the ESG category by simply adding a label.
The bank announced its plans in a statement to the press released Wednesday. And it's not just a handful of funds: this month, more than 130 funds across Danske Invest’s markets will be classified as ESG funds and 10 as funds with a 'sustainable investment objective', Danske revealed.
Danske will use definitions from Articles 8 and 9 of the EU’s Sustainable Finance Disclosure Regulation. After re-categorization, about 95% of all Danske Invest funds will be either ESG funds or funds with a sustainable investment objective
This would suggest that Slotte is already behind, since he told Bloomberg the other day that he expects 75% of large corporate loans to have some kind of a sustainable component. At Danske, the number of products carrying the ESG tag is closing in on 100%. ESG assets are already worth $35 trillion.
Investors are already signaling that they prefer a more detailed explanations of a company's ESG bona fides, rather than the more general outlines preferred by the sell side. Even now, companies that don't meet their climate-focused objectives (in the business, they call these objectives KPIs) can expect to see borrowing costs surge.
But if this were to happen all at once across a range of borrowers, this could potentially be a major risk to holders of ESG bond funds.