ESG, the acronym for “Environmental, Social and [corporate] Governance” has become something of a buzzword recently in the investment community, particularly for those funds and corporations who want to virtue signal a holier-than-thou nature with their investments, in lieu of making investments that they believe to be the most profitable. According to the Corporate Finance Institute (CFI), ESG is “The framework for assessing the impact of the sustainability and ethical practices of a company” (note that in the context of ESG “sustainability” refers not to the viability of a company over the long term but the extent to which the “E” is catered to). This cultural phenomenon has led to greater interference in the free market as companies compete for investment by attempting to score highly on these largely arbitrary and subjective metrics.
Politicisation of investing
For those who are already fortunate enough to be able to comfortably eschew the dynamics of formulating an investment thesis based on profitability and long term financial responsibility, ESG may seem like the dream ticket opportunity — you can now be woke with your balance sheet.
“Think whatever you want about Elon Musk, there’s no doubt his car company has been a game-changer for the environment. Yet somehow, out of the five US-based automotive companies, companies like Ford which make gas-guzzling trucks, Tesla’s ESG score is the worst. Why is that? Well, it turns out that what liberal elites think of Elon Musk seems to matter: the scoring system takes into account his eclectic personality, his tendency to tweet whatever he wants, his views on Covid, and his libertarian politics … Lockheed Martin has a better social responsibility score than Tesla … the scores are clearly political.”
— Kim Iversen
The criteria for how the scores are established are not publicly available, and this lack of transparency ought to be concerning. The shady elite who determine ESG scores do not provide information for how a company can improve their score or what might be letting them down, which has led many to investigate some of the logical inconsistencies. In the above quotation, Kim Iversen muses on the implausibility of a company such as Tesla receiving a worse score than other major US car companies, which is a reasonable question given the way in which the “green agenda” is so inextricably interwoven with the “E” aspect of the acronym. The lack of transparency and possibility for this decision-making to be conducted in a more egalitarian manner is problematic. Not only do these scores allow for a group of shady activists to disrupt the free market with their ludicrous virtue-signalling brownie points, but there is also no way of verifying their biases and agenda, and no way of verifying potential conflicts of interest. This issue is compounded when one considers that even if the rival car companies operating from the US scored more highly on the other dubiously subjective metrics, it is extraordinarily difficult to explain the rationale behind why Lockheed Martin (one of the largest arms dealers in the world) is deemed such a comparatively moral investment.
Who decides?
Various ratings agencies and third party providers are responsible for the issuance of ESG scores, meaning that not only is the process opaque in nature, but there is no standardisation, and accountability is largely removed any individual agency. The subjectivity of the assessments means that the scores are largely meaningless. Companies such as Bloomberg ESG Data Services, Sustainalytics ESG Risk Ratings, and Thomas Reuters ESG Scores all operate with slightly different criteria and for slightly different target markets. RepRisk tries to use as little human input as possible, deferring the decision-making process to be made by Artificial Intelligence and machine learning rather than human beings. This lack of clarity, alongside the bizarre nature of the companies which score highly
Who benefits?
Fiat World
Those who are familiar with Austrian economics won’t be surprised that the Keynesian alternative has led to an evermore increasing politicisation of money. The potential for quantitative easing (almost always a direct result of government-induced hysteria or government incompetence) to subvert democratic processes by diluting accountability of elected officials (or in the case of the EU, unelected and obscenely incompetent bureaucrats) is one of the main reasons that war on a “soft money” standard is so never-ending — if politicians want to raise capital to fight a war on a gold standard they were forced to tax more highly or make cuts in other areas, whereas on a fiat standard politicians can simply enrich Her Majesty’s treasury at the expense of their citizens’ savings and continue handing cheques to Lockheed Martin indefinitely. Given that money acts as the “layer zero” for all value transfer within a society, it oughtn’t be a surprise that such ideological viruses can become so pervasive, and spread their tentacles into so many other aspects of public life. A politicisation of money means that pragmatism makes way for ideology, objective truths become opinions, and those who wield power have a disproportionate ability to further enrich themselves.
Although ESG is not a direct consequence of the money supply expansion, and such ideas could also gain influence under a sound money system, it does still contradict some of the core tenets of Austrian economics, particularly the Misesian notion that centralised planning agencies will always and invariably create unintended consequences and produce results that are inferior to what would have been produced in a truly free market economy. With regard to ESG the conundrum is not that governments are actively advocating for this form of investment, but that a plutocratic elite have managed to foment an ethos so palpable that they are able to dictate the flow of large investments. Even if it isn’t a government issuing these declarations, it remains to an ideologically-unilateral force, which punishes those outside the status quo of what is deemed “acceptable”.
The bifurcation that this has created in the investment world isn’t just one of “responsible” versus “irresponsible” companies; the adoption of ESG policies highlights the apparent obsolescence of investments based on sound fundamentals in favour of being forced to fully a herd so as not to displease shareholders. In my previous article I wrote on the ways in which, as a society declines, lateral thinkers are locked out of the dominant positions of society as linear thinkers become further entrenched into management positions. In other words, those who have true leadership capabilities (innovative, adaptable, open-minded) are forced to work under those whose skills are more attuned to conformism. Alongside a current zeitgeist that seems quite incapable of independent critical thought, ESG is a symptom that western society is on a downwards trend.
Microsoft
Bill Gates has become quite the villain in recent years. If gleefully rubbing his hands together like Gollum in his creepy interview about Jeffrey Epstein wasn’t enough to disconcert a lot of people, then certainly the power the he wields in the pharmaceutical industry combined with his media and lobbying interests have caused some concern.
As someone who has been amongst the wealthiest men in the world for several decades, there is no doubt that Bill Gates is someone who wields a disproportionate amount of power. Various studies and reviews have been performed by third parties on some of the more nefarious aspects of the influence that Gates wields, such as that published by Sharmeen Ahmed, in which she cites a series of scandals that Gates has become involved in in recent years. Firstly, she notes that “Critics have shared concerns on the Gates Foundation and potential policies on population control”, as well as going on to examine more detailed case studies in which allegations are made that the Bill and Melinda Gates foundation used Africa as a testing ground for vaccinations and pharmaceutical interventions. It is alleged that Africa and India were used as testing grounds in order to circumvent the FDA regulations that would have applied in more developed countries. Other reports have circulated demonstrating that in many of the vaccination trials that The Gates Foundation has been responsible for over the past few years, the intervention only made things worse. For example, the DTP vaccine, which was discontinued in the west in the 1990s due to thousands of reports of death and brain damage. In a report by Children’s Health Defence, it was shown that The Gates Foundation, in conjunction with GAVI and the WHO, decided that it ought to be a priority for African babies. The evidence since then is that those children who were vaccinated died at 10x the rate of those who were unvaccinated.
GAVI’s ability to financially punish African nations who do not have a high degree of willingness and uptake of the aforementioned vaccines has made the entire practice even more insidious: the vaccine-swinging harbingers of death, led into battle against African children by their creepy leader (who, let’s be honest, is probably also a paedophile), have faced little to not real opposition. Instead, Gates bragged in January of 2019 that these investments have been some of the most profitable has ever made.
Any objective third party undertaking the responsibility of allocating ESG scores ought to have exercised the appropriate due diligence. They ought to have considered the moral ramifications of recommending investments in a company whose founder (the “G”) is allegedly responsible for tens of thousands of deaths in Africa, as well as the ongoing concerns in so far as the power he continues to wield at the WHO, especially in light of the government-sponsored coronavirus hysteria. Fortunately for Microsoft, none of these contentious issues have been accompanied by an appropriate level of criticism and subsequent consequence; of every company in the world that has an ESG score, Microsoft ranks number one. This means that Microsoft is better than every company in the world at making an appropriate balance between addressing environmental concerns, social concerns, and appropriate corporate governance.
Conclusion
In conclusion, the entire system of ESG is a load of bullshit and it is my contention that investors have a moral obligation not to base their investments upon the subjective and shady whims of ideologically-driven virtue-signalling. However, the extent such contrarian thinking is profitable in the short term is questionable, given that the thesis of ESG has become so pervasive that funds have restricted flexibility in their investment decisions and to run the risk of not following the herd means that attracting capital can be difficult. Over the long term, I have no doubt that such ideologically-driven inefficiencies stemming from interference in the free market ought to abate, but there is no telling for how long these practices can continue.
ESG scores are utterly meaningless: the way that scores are allocated is contentious, the scores themselves are subjective, and some of the scores are clearly the result of overt corruption and/or manipulation. As a cultural virus, ESG is arguably far worse than government intervention in free markets due to the lack of accountability for both those who make the scores and those responsible for propagating the ideology.
In the mean time, for those who aren’t mindless sheep buying the ETFs with green ticks of approval, ESG does provide an interesting market dynamic. Many analysts have noted that shares that aren’t included in ESG-approved ETFs (note: several arms manufacturers and traders still are), such as companies that sell tobacco products, are trading far below their fair market value. Moreover, the apparent complete lack of comprehension as to the threat of ESG, the importance of Bitcoin, and how to gauge Bitcoin companies in the context of ESG, means that Bitcoin-related companies may also be trading at a discount relative to their true market value.
Claims made against the opaqueness of ESG as a corporate whitewashing are well-made. Very interesting point about Tesla, feels like people are missing the forest (widespread adoption of electric vehicles and finally making them 'trendy') from the trees (is Tesla hitting ESG metrics).
Some of the conjecture is a bit misplaced IMO, the most libertarian capital markets have been shown to spectacularly fail at fair and effective resource allocation in the presence of information asymmetries and natural monopolies (healthcare the best example), and the best argument against it seems to run afoul of the no-true-scotsman fallacy - "if only we had more liberalisation, we could finally escape the clutches of crony capitalism."
I think ESG and intervention has a role to play, if only because Austrian economics has yet to be tested in anger, and it would be an extremely dangerous game to play when, quite often, people's lives are on the line. Instead we should, IMO, focus on transparency and accountability, and iterating upon the current system to align it with meaningful outcomes, as opposed to throwing up our hands and giving up on well-intentioned initiatives.