The Folly of ESG and Other Hypes

Corporates of all sizes used to crave recognition for their embrace of wholesome ESG values. Environment, Social, and Governance were deemed all important to woo both customers and investors. Promises and commitments were made, examples set, and case stories published – all to great acclaim.

Now, just a few years later, the hype has thankfully abated. As a concept or philosophy, ESG has been exposed as mere window dressing. It also proved the downfall of that most maligned of corporate events, the World Economic Forum. The annual fest turned into a platform of smoke and mirrors used by grandstanding CEOs to establish their ESG credentials: they would care for the environment, combat inequality, and offer full transparency – all the while offering investors ever higher returns.

Their ‘talk’ – let’s try to keep things civilised – was eagerly lapped up by investment managers trying to prove that a modicum of wokeness could work wonders on the bottom line. The media too was all over ESG as if it was the revelation we all had been waiting for.

Such it appeared to the world’s biggest investment manager Larry Fink, CEO BlackRock, who in 2018 put his considerable weight behind ESG and excitedly hailed it as the only way forward. And, when Larry speaks the world listens. Mr Fink has since regained his senses, to the dismay of many do-gooders, and now confesses ‘shame’ for having jumped on the bandwagon.

Mr Fink no longer uses the toxic term and now speaks (and writes) about ‘conscientious capitalism’ instead. He prefers to talk about decarbonisation and the need to address governance and social issues. It would appear that Mr Fink only adjusted the terminology. He, as well as most CEOs of big corporates, are still terrified of speaking out lest they be unceremoniously crucified for singing from a deviant hymn sheet.

Laggard Funds

BlackRock has already lost billions in business from states such as Florida and Texas over Mr Fink’s sanctimonious stance, the one he now regrets. The company’s flagship ESG fund [ESGU] last year saw almost half of its $25 billion depart to, presumably, greener pastures. The ESG fund industry is troubled by the absence of standards. In fact, each fund sets its own and even then compliance is not a given.

MSCI is mulling the downgrade of about 31,000 ESG funds over greenwashing concerns. Returns are also mostly disappointing. When money was cheap, ESG investment managers could keep up with the broader market, but after interest rates surged, their portfolios struggled to keep up. The underperformance of ESG funds is however hotly disputed by those that juggle with statistics.

ESG came into being as a gauge of goodness. It came out of a United Nations initiative to define and promote ‘responsible investing’. Countless CEOs promptly joined the queue to solemnly pledge adherence to the six principles of the platform – and gift that to their marketing department.

However, ESG fund managers soon discovered that ‘goodness’ has limited appeal when chasing investors or their money. So, using clever language – ‘risk mitigation’ was a favourite – they began touting the superior returns on ESG-hedged investments and their ‘sustainability’ – suggesting that the returns would keep coming whilst saving the planet.

Fund managers were filmed visiting farms, forests, factories, fishing trawlers, and mines sporting gumboots, safety goggles, oilskins, hardhats, and other macho gear to unearth nuggets of value in unexpected places. The modern money manager no longer pours over stats, spreadsheets, annual reports, filings and other boring stuff, but is ‘out there’ braving the elements, meeting workers, gathering anecdotal evidence, and smiling a lot whilst at it.

Marxist Similarities

In a sense, the ESG troupe resembles the Marxists of yore whose response to every failure included the refrain that their philosophy had never been ‘properly implemented’. As an expression of good intentions, Marxism paved the road to hell. ESG fans must try to avoid such a fate. ESG investors may abhor humanity’s vices such as its addiction to fossil fuel and war; it is no use pretending that these bad habits can somehow be banned by adherence to principles of responsible investing.

Be careful what you wish for too: ban oil and the world would stop in its tracks – and your investments would evaporate. The stuff is literally everywhere. Also, refrain from investing in the production of arms – how noble! – and before long you’ll be taking orders from the Kremlin or some equally illiberal place – and your investments would evaporate.

ESG is an extremely silly pursuit as are, by the way, valiant attempts to limit global warming to an agreed-upon rise in temperature. Entire tracts have been, and are being, written about the urgent need to stop climate change. In yesterday’s Financial Times, Jonathan Adair Turner, Baron Turner of Ecchinswell and one of the UK’s foremost ‘technocrats’, expounds at great (and interesting) lengths about the need to transition away from fossil fuel and towards a net zero world.

The baron’s insights, though fascinating, lead him to believe that we can and must stop global warming at plus two degrees if we only manage to stop emitting carbon dioxide. Whilst global warming is very real, for all to feel, and indeed caused by humans, it is beyond comprehension that net zero advocates fail to mention that CO2 doesn’t magically break down and lingers in the atmosphere for centuries on end. Even the IPCC recognises this fact although fails to emphasise it.

Doomed

Unless we collectively find a way to remove the excess CO2 from the atmosphere, there is literally nothing to stop the planet from warming up even more than it already has for the next seven or so generations. Tinkering with emission levels is a mere distraction and, as such, unhelpful. Any approach that includes continued carbon dioxide emissions above net-zero level only serves to kick the proverbial can down the road.

A hodgepodge of vague values, ESG does serve a purpose: it offers both a fig leaf and an excuse for seeking alpha without a bad conscience. Some thirty years after the concept was first unveiled, the environment has not measurably benefitted, social inequality increased, and governance deteriorated. Once upon a time, CEOs were only accountable to shareholders. With ESG, they must include all stakeholders which implies that they are no longer accountable to anyone. And it shows.

Though Baron Turner of Ecchinswell revealed only half of the story, the bit he did mention still merits serious consideration. The ‘drill-baby-drill’ approach of Donald Trump is sure to exacerbate whatever climate issues the world already suffers. Given that, for now, removing CO2 from the atmosphere on the scale required to address global warming remains an impossibility, humanity should at the very least stop adding to the problem and start accepting the new normal: a progressively warmer climate and the imperative need to reach net zero at the earliest opportunity. Just don’t expect the planet to start cooling at net zero. That won’t happen for a few hundred years yet: manage your expectations.

Cover photo: The world’s insatiable demand for electric power is not yet met by renewables.

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