One thing to start: I have always had mixed feelings about Elon Musk, the chief executive officer of Tesla. Like many, I salute his bold vision and determination to fight climate change with electric vehicles. But I also wince about his (idiosyncratic) style of corporate governance, among other things.

Either way, few can ignore him. So his tweet on Friday suggesting he might now invest in lithium mining to guarantee a ready supply of battery metals for the EV industry is worth noting — not least because it shows how the “green” sector is being hobbled by supply chain problems amid the Russian invasion of Ukraine. And it raises a big question: should mainstream environmental, social and governance investors also be jumping into mining now, if they want to combat climate change? If so, can they do this in a responsible way?

Meanwhile, in this week’s newsletter we have an exclusive interview with Peter Thiel, another controversial Silicon Valley figure, who explains why he really lashed out at ESG last week, and whether the sector is in a bubble. Plus, new data show that black Americans are far more enthusiastic about ESG investing than their white counterparts. Read on. (Gillian Tett)

ESG: the new ‘hate factory’?

Peter Thiel, the ultra libertarian west coast investor, loves to make waves. He duly did that at last week’s Miami Bitcoin 2022 conference when he dismissed revered investor Warren Buffett as a “sociopathic grandpa from Omaha”, and described Jamie Dimon, chief executive of JPMorgan Chase, and Larry Fink, head of BlackRock, as a “finance gerontocracy” because of the trio’s wariness about crypto. (You can listen to his headline grabbing remarks here.)

But what was equally memorable was that Thiel also called ESG a “hate factory for naming enemies” that was being used by incumbents to squash upstarts. He then presented environmental investing as “sort of fake”, likening ESG standards to the Chinese Communist party. “Woke companies are quasi-controlled by the government in a way that bitcoin never will be,” he declared, to cheers. Ouch.

So why is Thiel lashing out against ESG now? Moral Money posed the question to him after the Miami speech, and he argued that the real issue was that he wanted to defend bitcoin. “I don’t necessarily have problems with ESG per se,” he explained, but rather disliked how ESG investors had tried to curb shale oil and gas activity (a topic that is timely now, given current energy security issues.) And he was doubly cross that the crypto sector had been attacked by western politicians, and the incumbent financiers he dislikes, over its heavy use of energy (much of which has historically come from filthy sources).

“[My comments were] particularly about bitcoin,” he explained. “[Last year] it felt like there was a revolution, a youth movement driving bitcoin and then it hit the wall with institutional older retail baby boomer investors . . . It’s partly because institutional investors are naturally slow, but I think the ESG argument was the key anti-bitcoin argument which slowed adoption down in spring of 2021 — it turned out to be decisive in this area.”

Moreover, he argued that the attack on bitcoin’s carbon footprint was hypocritical given what was happening in mainstream finance. “It is not clear why we should single out bitcoin compared to gold — if you think about mining there are issues. I would push on the double standard of bitcoin versus gold.”

Some financiers might cite other factors that have slowed the expansion of crypto — like regulators’ wariness about potential fraud. Conversely, green enthusiasts might argue that it was entirely right that the bitcoin sector was attacked over its emissions record. And crypto aficionados might note that efforts are currently under way to create a greener version of digital assets, either by shifting from a so-called “proof of work” methodology to “proof of stake” approach, kite-marking green energy sources, or creating entirely new platforms. (Check out some of our past coverage on the Rocky Mountain Institute project or innovations such as the crypto platform Chia.)

Either way, Thiel argued that it was hypocritical for incumbent financial companies such as JPMorgan or BlackRock to wave the ESG mantle when they continued to invest in countries such as China, with bad human right records. And he suggested that the sector could be facing a turning point. “The ESG sector has had a lot of energy and momentum behind it, for very good reasons, but maybe we are now at a point where it feels like where ESG has over-reached or is a bubble or has been hijacked. Because it is a lot bigger and more powerful, it is probably [a] much easier target [now] than it was five years ago.”

ESG investors would do well to pay attention — even if they dislike Thiel’s libertarian record (and/or the fact that he previously backed the campaign of Donald Trump.) After all, as I discussed last week, Russia’s war in Ukraine is creating big challenges for ESG. Company boards currently feel rising social pressure to behave in an ethical way because of enhanced transparency. But many companies’ boards are unsure how to handle the trade-offs between social and environmental goals.

Crypto might yet be another case in point. Either way, ESG investors should take note of Thiel’s comments — not least because they need to know how they do (or do not) frame their ESG priorities these days. (Gillian Tett)

Venture capital perks up to ESG

Until recently, the venture capital sphere has been largely shielded from the public scrutiny of the ESG movement — partly because meetings take place behind closed doors and early-stage capital is more challenging to track.

That is starting to change. A conference of the Global Private Capital Association last week in New York showed that many funds are facing fresh pressure to meet ESG standards. “VCs have started to answer ESG-related questions in higher volumes than ever before,” said Tracy Barba, head of ESG and global stakeholder engagement at 500 Global, a VC firm based in San Francisco. “Most people believe that it is because of regulation that VC firms are starting to grow their ESG staff and expertise, but really it is pressure from European investors and the hope for eventual IPOs,” Barba told Moral Money.

The big problem for VC investors and entrepreneurs, though, is that most existing ESG metrics were created for public companies — and big ones at that.

But now, some investors worry that if sustainability issues aren’t in focus until a company goes public, at that point it will be too late to reverse course.

Look at Allbirds for an example. The shoe company went public earlier this year, but soon afterwards walked back much of the ESG language in its filings after its claims came under scrutiny. Investors at a private capital conference last week told Moral Money that the moment marked a turning point. If an IPO turns sour due to sustainability concerns, VC firms stand to lose millions.

The rub is that VC funds have often struggled to adapt larger sustainability frameworks to their portfolio companies. However, market-specific offerings are finally emerging. Barba has created a bespoke ESG framework specifically for venture funds, based on multiple sustainability frameworks (SASB, GRI, IRIS, UNPRI, B Corp and the IFC exclusion list).

Guidance like this is in high demand: Barba said other funds asked for the framework guidelines weekly. There’s also VentureESG, a non-profit advisory firm that is focused on providing ESG tools to investors at an early stage, which popped up in 2021.

So far, the push to integrate ESG into venture capital has mostly been led by Europe — 70 per cent of VCs consider ESG in their investment decision-making process, according to the European Investment Fund.

But, there is debate about what ESG really means in the venture space. In a panel that looked at the next hotspots for VC, panellists from the Middle East, Africa and Asia said that all investing in emerging markets should qualify as “ESG”. But that is not universally accepted.

And the most influential VCs are moving slower than the rest to embrace the term, a report from the UN Principles for Responsible Investment found earlier this year. Harvard Management Company, the asset manager for the university’s $53.2bn endowment, criticised the industry saying that “investors who overlook ESG considerations are making a fragile stage of business development even more risky”.

The lack of progress on ESG is not necessarily due to a lack of interest; millennials seem keen to drive this forward. But a common observation from the conversations last week was that it is tough to integrate the sustainability language and frameworks for early-stage projects that are hyper-focused on growth.

However, Barba said she gets called by headhunters constantly to lead the ESG efforts at VC firms. And while Sequoia Capital, a leading VC group, is the only other major US VC company with a dedicated sustainability lead, others are looking to hire, investors told Moral Money. Watch this space. (Kristen Talman)

Chart of the Week

Black investors place more value on ESG credentials than white counterparts, Ariel Investments and Charles Schwab found in a recent survey. The report, which surveyed a total of 2,057 individuals — about half identifying as black and the other half as white — found that black investors were far more interested than their white counterparts in aligning their investments with their personal beliefs, with 58 per cent saying that value-aligned investment could lead to better performance.

Smart read

• Private equity has been pouring cash into the US healthcare sector, writes Rana Foroohar in this unsettling column. But instead of boosting cost-saving competition, the trend is helping to make this sector “a new and more dangerous area for rent-seeking”.