Another market meltdown, and another costly lesson for ESG.
After being caught on the
About 915 funds registered under
For ESG investors, SVB appeared to tick several boxes. The bank was a big lender to renewable energy companies, a favorite among ESG managers on the lookout for low carbon footprints. But when it came to governance risks, fund managers seem to have been less attentive.
"There are a lot of lazy asset managers taking ESG scores for granted," said Sasja Beslik, a sustainable finance veteran who's now the chief investment officer at NextGen ESG. The failure of SVB shows that fund managers who go "all in on carbon are not necessarily managing other risks."
Rebecca Self, a former senior banker at HSBC Holdings Plc who now runs Seawolf Sustainability Consulting, says that attempting to run ESG portfolios by fixating on only one of the three elements that make up the acronym, which stands for environmental, social and governance, is risky in itself. ESG fund managers have focused too much on "specific topics in isolation," she said.
For the ESG investment industry, the collapse of SVB may go down as a textbook case of what happens when an asset manager tries to build a climate portfolio without doing proper due diligence on social and governance risks.
"People worry about 'G' only in a crisis, no one talks about 'G' when stock prices are going up," said Shivaram Rajgopal, an accounting professor at Columbia University's business school in New York.
Paul Clements-Hunt, who led a United Nations group that coined the acronym ESG back in 2004, has long argued it's wrong to build investments that ignore one of the pillars of ESG.
"Get the 'G' wrong and it undermines everything else," said Clements-Hunt, who's now a sustainability director at U.K. law firm Mishcon de Reya LLP.
Among asset managers with the most ESG funds exposed to SVB are Amundi SA and BNP Paribas SA, according to data compiled by Bloomberg based on the latest available regulatory filings that include direct and indirect holdings through funds of funds.
BlackRock Inc., SVB's second-biggest shareholder overall, directly owns almost 380,000 shares via EU Article 8 funds and non-EU ESG funds, according to data compiled by Bloomberg that's based on disclosures between Jan. 31 and March 9. The data, which doesn't include BlackRock's indirect ESG exposure to SVB, represents just under $100 million, based on valuations at the times of filing.
Spokespeople for Amundi, BNP and BlackRock declined to comment.
SVB marketed itself as a bank for tech entrepreneurs, a business model that resulted in a
Exposure to SVB was rendered all the more risky by the absence of rigorous regulatory oversight, as U.S. watchdogs focused their attention on lenders judged too big to fail.
ESG fund managers often tout their engagement strategies, whereby they meet with portfolio companies and go over the risks that need addressing. But given SVB's "A" rating at MSCI Inc., and a "Controversy Level" of zero at Sustainalytics, it's likely that portfolio bosses didn't think the bank was in urgent need of improvement.
"For SVB to get a high overall ESG rating based on its tech and clean-tech focus without deep consideration of 'G' is just poor analysis," Clements-Hunt said.
SVB's spectacular collapse shows there was "a massive governance issue," Alp Ercil, whose Hong Kong-based fund Asia Research & Capital Management controlled $3.5 billion in assets as of January, said at an
"And it's going to be a huge case study that hopefully Wharton will write on the 'G' component of ESG," he said.
— With assistance from Amine Haddaoui and Carlo Maccioni
