ESG investing, or: you redefine good and I’ll redefine greed

One of the Hottest Trends in the World of Investing is a Sham announces the title of a recent opinion piece in the New York Times

It’s written by Hans Taparia, a “a clinical associate professor at the New York University Stern School of Business and a former entrepreneur.” Here are some extracts:

  • Wall Street has been hard at work on a rebrand. Gone is the “Greed is good” swagger that embodied its culture in the 1980s…At the heart of this rebranding is a new industry of funds, created by BlackRock and peers such as Vanguard and Fidelity, that purport to invest in companies that are good corporate citizens — that is, companies that meet certain environmental, social and governance criteria. These E.S.G. criteria are wide ranging, pertaining to issues such as carbon emissions, pollution, data security, employment practices and the diversity of corporate board members.
  • On the face of it, E.S.G. investing could be transformative, which is why it’s one of the hottest trends in the world of investing. After all, allocating more capital to companies that do good helps them grow faster and lower their cost of capital, creating an incentive for all companies to be more socially and environmentally conscious.
  • But the reality is less inspiring. Wall Street’s current system for E.S.G. investing is designed almost entirely to maximize shareholder returns, falsely leading many investors to believe their portfolios are doing good for the world.
  • Perhaps the biggest problem is the ratings industry….contrary to the spirit of E.S.G. investing (and likely unknown to most investors), the leading rating agencies are not scoring companies on their degree of environmental or social responsibility. Instead, they are measuring how much potential harm E.S.G. factors like carbon emissions have on companies’ financial performance.
  • Corporate responsibility and financial risk, however, are not the same thing. Indeed, they can be diametrically opposed.
  • McDonald’s, for instance, was given an upgrade of its E.S.G. rating last year by MSCI, which cited reduced risks to the company’s bottom line as a result of changes that the company made concerning packaging material and waste. But greenhouse gas emissions from the operations and supply chain of McDonald’s, which is one of the world’s largest buyers of beef, grew by 16 percent from 2015 to 2020. Those emissions are a direct cause of climate change, but because MSCI didn’t see them as posing a financial risk for McDonald’s, they didn’t negatively affect the rating.

Indeed, the article finds that 90 percent of stocks in the S&P 500 can be found in an E.S.G. fund built with MSCI ratings. Taparia suggests: “The best approach would be for rating agencies to measure the costs to society and the environment that are not directly borne by companies — what economists call negative externalities. This would include the health care costs to society of smoking or excessive soda consumption or the acceleration of climate change as a result of greenhouse gas emissions.” But as we’ve noted in the past, even the current highly compromised system of ESG investing attracts increasing right-wing opposition as an example of “woke capitalism.” Taparia implicitly suggests those nay-sayers would do better to applaud it, as “just regular capitalism at its slickest: ingenious marketing in the service of profits.”

We’ve covered similar territory several times before, maybe often enough that a casual reader might claim to detect a terminal skepticism on my part. I should assert again then that I don’t have any doubt about the inherent virtue of or necessity for the ESG movement, if that’s the phrase for it. But Taparia reminds us again that the existing system of market-friendly capitalism is inherently antithetical to ESG, because one is driven entirely by finding and exploiting opportunities for generating financial value, and the other is (or ought to be) about leaving some of those opportunities on the table for the sake of broader, more widespread goals. Sure, an ESG fund might modify some of the investment decisions it would otherwise take for the sake of environmental and social goals, but the dynamic is to often such that it will inevitably find itself overpraising small steps in the right direction while having to shrug regretfully over larger steps still being taken in the wrong one.

But even if the ESG investment movement attained a state of perfection (however that might be defined), it still wouldn’t be enough to clean up all of society’s toxic “externalities.” Here in Canada, it’s highly foreseeable that the next government might be at best apathetic toward environmental policy and possibly actively hostile to it; the US is even further along that road; and all the progressive goodwill in Europe can only go so far in the face of pressing day to day challenges and hardships. Further, the political right’s increasing obsessive regressivity inherently preserves concentrations of power and privilege that embody unsustainable excess and pillage. Whatever the way forward on ESG might be, it can’t possibly be a politically neutral one, much less one that basically only puts a fragile new shine on traditional “business-friendly” assumptions.

The opinions expressed are solely those of the author

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