SRI-ESG: is your investment socially responsible?

In La Tribune 7 août 2019

This summer, the reception of a tweet sponsoring an Environment Social and Governance (ESG) financial brochure devoted to natural resources sounded like an alarm: how do financial institutions apply the philosophy of Socially Responsible Investment (SRI) in the details of their financial products, and in particular about agriculture, energy and minerals? The concern was well-founded. The brochure questions as much it contains errors, obsolete references or without guarantee, approximations or caricatures.

A carbon-free or green investment portfolio could perhaps be considered by banning securities of companies operating directly or indirectly in natural resources. Otherwise, the manager must somehow guarantee that its SRI moral guaranteed to the ESG investor is based on a serious understanding of agricultural, energy or metal issues.

Forget provocative vocabulary

Dedicated to the industry, the brochure investigates the “rare metals” it consumes. But its starting point is wrong: such metals do not exist in industry, the term has no meaning. If such a metal is stamped rare, i.e. “unobtainium”, what would be the definition of this rarity if the fundamentals of its market do not register any tension because it is not or little used? First, we must abandon this provocative vocabulary and choose a tangible characteristic: abundant, sensitive, critical or strategic metal because their market elements are measurable and will facilitate analysis.

Strategic metal or unobtainium metal, words have a meaning, the first is eminent useful the second does not worth a patard because by ignorance the analysis is wrong. For example, the brochure imagines that lithium would be an unobtainium metal, although its exploration and production are expanding because the future demand for batteries is promising. This metal is rather sensitive, even strategic for some nations, although its falling price reflects technological progress and an excess of supply. The price of a sensitive, critical or strategic metal is therefore not necessarily high, nor its market is in crisis.

Other metals, same remark: cobalt, vanadium and lanthanides. The first had seen its price divided by nearly four since March 2018, the second by more than four over the past eight months, and lanthanide (rare earths) prices have been uninhabited since 2011. The rarity of these unobtainium items appears complex! However, why are they suddenly so courted?

Similarities with the subprime crisis

Let’s admit, imposture has heated up a place for them in the quaint news of fashion effects: used to awaken and shape public opinion or as an accelerator of political promises, they also inspire financial marketing. And because, using ESG criteria, the latter has undertaken to guarantee investors SRI elements that they do not fully understand, they are deceiving themselves and their own customers. In this configuration, the finance involved in the future of humanity is a danger because SRI is becoming global, if these mistakes multiply without a correction of high magnitude, the result could be between two recent situations, and on opposite extremes of the same axis.

The first saw sellers and buyers no longer understand what they were selling and buying, which led to a global crisis, the subprime crisis; the second looked like a clever scam and was the subject of a warning here and from the AMF, it remained local, it is the case of rare earth investments. If SRI favours the sensational and the ESG does not check on site, how will we catch up on promises that will slip away once they will already have committed the savings into patchwork investments?

To avoid a SRI crisis, reasoning truthfully about natural resources from false elements will require a solid experience.