Another market meltdown, and another costly lesson for ESG.
After being caught on the wrong side of Vladimir Putin’s war in Ukraine and the Adani scandal, hundreds of ESG fund managers are now dealing with the sting of having misjudged Silicon Valley Bank.
About 915 funds registered under European Union regulations as either “promoting” ESG or declaring it as their “objective” are exposed — directly or indirectly — to the now-collapsed bank, according to data compiled by Bloomberg.
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.
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On Tuesday, it emerged that SVB’s lack of a chief risk officer for much of last year is being examined by the Federal Reserve as part of its probe of the bank’s failure, two people familiar with the matter said. SVB revealed in a 2023 proxy statement that it appointed its CRO, Kim Olson, in late 2022. The bank’s former CRO was Laura Izurieta, who stopped performing the role last April and left SVB in October.
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.
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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 UK law firm Mishcon de Reya LLP.
Among asset managers with the most ESG funds exposed to SVB are Amundi SA and the asset management arm of 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 US$100 million ($135.12 million), based on valuations at the time of filing.
Spokespeople for Amundi, BNP’s asset management unit and BlackRock declined to comment.
SVB marketed itself as a bank for tech entrepreneurs, a business model that resulted in a dangerously concentrated loan portfolio exposed to a highly volatile sector, especially as interest rates rose. The bank ultimately lacked the liquidity to deal with the risks lurking in its loan portfolio.
For investors, exposure to SVB was rendered all the more risky by the absence of rigorous regulatory oversight, as US watchdogs focused their attention on lenders judged too big to fail. Prosecutors in the Justice Department’s fraud section, the US Attorney’s Office for the Northern District of California and the Securities and Exchange Commission are now probing SVB’s failure.
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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 US$3.5 billion in assets as of January, said at an event in Singapore.
“And it’s going to be a huge case study that hopefully Wharton will write on the ‘G’ component of ESG,” he said.