The ESG moral compass

There were lessons to be learnt for all businesses from Deliveroo’s IPO, in a market where ethics have become as important as the bottom line

CEO of BlackRock, Larry Fink

The global pandemic saw a lot of winners and losers in the world of business, but one industry that certainly benefitted from the effects of a global shutdown was home food delivery. A string of lockdowns lasting over a year made many of us connoisseurs of our local takeaways and, by proxy, the likes of Deliveroo and its nearest UK rival, Just Eat. When the former announced its initial public offering (IPO) on the UK stock market in March 2021, the company arguably could not have wished for better conditions.

After a year of almost constant lockdowns and with little or no access to the experience of eating out that so many of us missed, people turned to Deliveroo in their droves, causing the biggest upsurge in takeaway demand the industry had ever seen. At first glance, one would expect such perfect timing to result in a hugely successful IPO, with customers themselves being offered the option to buy shares in the company in advance of the general public, along with the usual investment giants. But the opposite was true.

Large UK pension funds such as Aviva and Legal & General shunned Deliveroo, in part because of the other reasons it grabs headlines – its treatment of the ubiquitous gig-economy riders that make up much of its workforce and its alleged lack of ethical working practices. Indeed, it is no coincidence that in the same month that the company sought to make its first public offering, a walkout was planned by hundreds of riders in London and beyond. Supported by the Independent Workers’ Union of Great Britain, the walkout cited the unfairness of workers’ terms and conditions and highlighted that, although the app brought convenience, ease and variety to its customers’ lives, the individuals working for the company were having a much tougher time.


PROFILE: TeslaElon Musk’s infamous battery car company Tesla makes a very small number of cars compared to enormous producers such as Ford, but investment in Tesla is a reflection not of the volume of vehicles it produces, but of confidence in the technology within those vehicles and the long-term potential that investors are seeking.

Of course, having had the electronic vehicle market mostly to itself in recent years, Tesla has had little competition and much greater potential for growth, but similarly to oil companies pivoting their offerings to renewables, traditional vehicle manufacturers like Ford are themselves pressing ahead with alternatives to gas-run cars.

Along with a reduction in reliance on fossil fuel will come a need for vehicles to also change the way they are fuelled. As a result, Tesla is a comparatively small electric car company but with a valuation greater than a lot of its older competitors in the industry.

A separate debate is whether the electricity grids available now and in the near future have enough power to charge a nation of electric cars, and there are concerns about whether EVs simply shift the emissions problem from the petrol pump to the power station, but the fact remains that investors seem to see that as less important than the more urgent need to invest away from non-renewable energy.


‘Moral’ investing
Deliveroo would appear to be a bellwether for a wider change taking place in the world of investing. Many major investment companies recognise this need for a different attitude, both for sustainability reasons as well as for profit. The term ESG stands for environmental, social and (corporate) governance, referring to the three main factors considered when assessing a company’s potential for sustainable investment in the long term and with it, its likelihood of turning a profit. Ethical investing is gaining in popularity, and ESG funds are now offered by numerous major pension funds and investment companies such as BlackRock, Hargreaves Lansdown and Aviva, offering the ability to invest while avoiding ethically ‘questionable’ areas such as big oil or arms trading, which are decreasing in popularity with everyday investors.

Investing in the stock market has never been simpler or more accessible to everyday investors

“Last year, I wrote that climate risk is investment risk,” says Larry Fink, CEO of Blackrock in his annual letter to CEOs. “In the past year, people have seen the mounting physical toll of climate change in fires, droughts, flooding and hurricanes. They have begun to see the direct financial impact as energy companies take billions in climate-related write-downs on stranded assets and regulators focus on climate risk in the global financial system. They are also increasingly focused on the significant economic opportunity that the transition will create, as well as how to execute it in a just and fair manner. No issue ranks higher than climate change on our clients’ lists of priorities. They ask us about it nearly every day.”

CEO of Blackrock, Larry Fink
CEO of Blackrock, Larry Fink

Sustainability pays
Not only are investors increasingly turning away from the old model of exploiting natural resources and the workers who produce them, but there is also significant money to be made by doing so, instead investing in more progressive industries and business models. Some funds aim to help investors take an ‘avoid’ strategy, which seeks to remove from a portfolio certain companies or industries that are associated with a higher ESG risk profile. This can work to broadly eliminate entire sectors or be tailored to the individual investor’s views and values; avoiding tobacco, weapons, or fossil fuels, for example. An alternative option is to use an ‘advance’ strategy: rather than working by process of elimination, this strategy instead seeks to specifically pursue or prioritise companies or sectors that are viewed as sustainable, progressive, and having a positive ESG profile, such as ‘green’ energy. BlackRock’s ESG strategy, like many of its peers, allows investors a range of options that fall within this spectrum.

There are very few large energy companies today that do not have a renewable offering

Given the increased demand for ethical investing, then, it is not surprising to see big players making a push to promote these sorts of funds (see Fig 1). Investing in the stock market has never been simpler or more accessible to everyday investors, and with the like of apps such as Mint coupled with a generation of people generally more morally ‘woke’ and financially literate than their parents before them, the public’s finger is on the pulse. More and more ESG-focused products are coming to market, and in some cases the uptake for these is greater than with traditional exchange traded funds or index tracker funds.

In the same year that veganism became a multibillion-dollar mainstream market and emissions from tourist travel plummeted, perhaps an increased emotional need to feel at ease with spending decisions has translated into the world of investing once and for all. The results are speaking for themselves: “Over the course of 2020, we have seen how purposeful companies, with better environmental, social, and governance profiles, have outperformed their peers,” Fink explains. “During 2020, 81 percent of a globally representative selection of sustainable indexes outperformed their parent benchmarks,” he added. If more people are newly investing in ESG trackers over conventional ones, and if those trackers of companies scoring highly on ESG then outperform the market overall, no wonder their popularity has exploded.


Relentless spending
Another effect of coronavirus has been to provide the chance to slow down and consider how – and with whom – we spend our money. Concurrent with the closing of shops and the slowing of industry was an opportunity to take stock and reflect on the relentless spending culture we live in, and the attendant environmental and social concerns that this raises. Who can forget the good news stories about the natural world beginning to recover so quickly, and the sharp reduction in carbon emissions recorded last year while millions of people stayed at home experiencing a day-to-day life very different from normal?


PROFILE: EquinorEquinor, the biggest oil company in Norway, was known as Statoil until 2018 when it underwent a multimillion-dollar rebranding project, reflecting its plan to diversify its offering and change as a company.

Reuters reported at the time that the company was determined to develop its investments in renewable energy, and today it declares its target to be net zero by 2050, while pushing ahead with its investment in Dogger Bank, which it says will be the world’s biggest wind farm, currently being built off the coast of the UK.

There are very few large energy companies today that do not have a renewable offering, and realistically there will be very few new oil companies in the coming years. It is for those existing ones to pivot their offering because the science shows that sooner or later, we will run out of oil and have no choice but to pursue alternative options.

It is for the new companies that are founded to have a different approach, not only to resources, but also to the way those resources are pursued.




In recovering from coronavirus and in securing an environmentally sustainable and profitable future, companies will need to adapt or suffer the consequences, whether that be for their social and human rights practices, environmental reasons, or simple reputation. The worldwide management consulting firm McKinsey & Company said in 2020 that “we can already start seeing how the pandemic may influence the pace and nature of climate action, and how climate action could accelerate the recovery by creating jobs, driving capital formation, and increasing economic resiliency.” Consider the following examples:

In word and deed
Deliveroo has been heavily impacted by the exodus of investors pre-IPO who said they were not interested at all, and several large UK pension funds said this was specifically due to its working practices and the likelihood of future litigation around the business that will impact its profitability long term. There are various court cases in different jurisdictions that are concerning for investors.

The problem with these is that they do not just impact the business in the short term with the result of bad PR and direct strike action affecting profits and business-as-usual. If there are court cases that are unresolved, that is a risk to the business long term, because if the decision in the court is that food delivery companies must start treating staff in a different way and paying them as salaried or pensioned workers, they are likely to be less profitable as a result.

Another issue is that of valuation. Deliveroo was originally priced at £3.90 a share and is trading much lower than that at the time of writing at around £2.53, so the company has seen a loss in share value since coming to market. If the same had been true of a different company with no ESG concerns, those same large investors may initially consider the pre-IPO valuation too high, but then choose to invest later as the result of an unforeseen price drop.

It is for the new companies that are founded to have a different approach not only to resources but also to the way those resources are pursued

This will not be the case for Deliveroo or other companies that give investors cause for concern; if a company’s value drops 30 percent because of a non-ESG issue, investors may well change their minds and then invest. But if an investment company says no due to ESG concerns, no fall in value will make that less true. Deliveroo’s shares could plummet to a bargain price but while the ESG concerns are the same, a large investor that has explicitly stated those concerns would have it reflect very badly on them if they subsequently invested anyway.

Environmentally, there are legitimate concerns about the volume of food and plastic waste that has been generated from a year of extra takeaways, not to mention the emissions from thousands of delivery workers transporting the orders. Deliveroo has acted on this aspect to some extent, publicising a carbon neutral project for its Australian operation at no cost to its customers, but only for two years, beyond which it has made no further commitment.


PROFILE: AirbnbAirbnb is a business that built a name for itself by democratising the world of travel accommodation.

From 2008, when it was founded, travellers were suddenly given options other than hotel rooms or hostels, and the direct platform was slick, easy to use, and apparently transparent.Not only that, it was cheap – customers liked Airbnb because they could access interesting homes and spaces without having to pay for hotel staff or overheads.

Soon enough however, private individuals with enough money behind them began to capitalise on the platform’s model and the app was slowly filled with properties bought solely for the purpose of being Airbnb rentals.

People were using it as a method of wealth creation and running it as a business, which, although not against the rules of the website by any means, is arguably not in the spirit of why Airbnb started.

Furthermore, Airbnb has been repeatedly criticised for having a model that dodges the sort of regulations governing hotels.

It is very easy to set up as a property investment business on the platform, with the result that local private residents have been priced out of their own neighbourhoods due to cheap apartments and homes being bought up, renovated, marketed solely as Airbnb properties, and never lived in as regular homes.

This results in a gentrification effect and the character of the area begins to fade.

Movements in Amsterdam, Barcelona, London and New York have sprung up in response to this and some cities have begun to regulate more stringently, meaning the company’s reputation has fallen out of favour. But the Airbnb platform remains as popular as ever with travellers seeking unique experiences in exciting locations, and its stock market success reflects this.

After an IPO in 2020 of $68 per share, Airbnb’s stock soared as high as $165, and at the time of writing is worth around $134.


Full circle
It goes without saying that investment companies need to preserve their own longevity over the decades to come. It is in everyone’s interest to pursue sustainable, ethical investing, for if the world’s investments do not pivot in line with the global need for sustainability and future-proofing industry, the fiduciaries themselves will not be immune to the consequences.

Just because household name investment companies and pension funds have ESG guidelines however, certainly does not mean they are not continuing to invest in oil companies, arms manufacturers, aerospace and other unsustainable markets while the getting is still good. In a recent report, Greenpeace highlighted that asset managers and banks globally continue to invest in fossil fuel production. “Since the signing of the Paris Agreement in 2015, the world’s largest 60 banks alone have provided $3.8trn to the fossil fuel industry,” says Daniel Jones of Greenpeace UK.

Individual financial institutions might be voluntarily dialling down investments in such areas long-term, but Jones’ view is that until the institutions themselves are held to the same emissions standards as other industries, meaningful change will be stymied in favour of greenwashing as they are allowed to continue self-regulating. Blackrock projects that the sort of companies that adhere to ESG requirements will outperform peers over time because they are doing business the ‘right way,’ and if they continue this in the long term, they will be better underlying investments.

As for what power individual consumers and businesses have over the future, there are various schools of thought. One is classic purchase power, and there are numerous grassroots movements and larger online campaigns for consuming ethically or locally and making conscientious decisions about where one’s money goes, not to mention growing wealth sustainably. Surely a significant change will come even sooner if larger numbers of people holding pensions in investment firms drive an ethos that places sustainability and ethical business practices at the top of the agenda. BlackRock’s CEO certainly seems to think so.

A Greenpeace ‘greenwashing’ protest at the European Parliament in Brussels, Belgium
A Greenpeace ‘greenwashing’ protest at the European Parliament in Brussels, Belgium

A turning tide
Perhaps we need to ask what exactly is turning the tide, if indeed it is turning at all. Deliveroo is not the only business to have been hit with a raft of accusations of shady working practices, poor treatment of workers, and taking advantage of the very individuals whose technical skills, networks, ingenuity, and plain old hard work helped them build big capital in the first place. Large energy companies may well shout about investing in renewables, but until we experience a global shift away from their reliance on fossil fuels, accusations of greenwashing would appear to be justified.

Companies now report on modern slavery, the gender pay gap, ethnicity of their workforce, and future-proofing their organisations; ESG is a wide-ranging term and there is a lot of data being collected and reported on. Depleting natural resources and exploiting the work of many to channel wealth upwards will not be tolerated by the public for much longer. It seems that increasingly, investment companies are scrutinising not only the bottom line when it comes to assessing the value and potential of a business, but also the way in which that bottom line is reached. In order to achieve stock market success, businesses of the future would do well to pay attention to the trend.