Don’t dismiss the Anti-ESG rhetoric

There’s one thing that we all seem to agree on. There are no standards for what ESG is, and yet, it dominates market attention. As a result, there is general befuddlement across investors, financial services firms, corporates, boards, and apparently political pundits.

Since Elon Musk and Peter Thiel made public statements damning ESG as ‘the devil’ and the CCP, there has been a noticeable uptick in conservative anti-ESG videos on YouTube. So to understand what their viewpoints were, I took a listen to hear what all the fuss was about.

Fallacy I: ESG is a values-based trick by liberals to impose their morals on you

I get it; saving the world seems like a liberal conspiracy. Indeed, an investing thesis built on the surface-level alignment with liberal concerns like climate change, equity, and executive compensation does have a particular leaning. However, what I found most strange is the still rampant climate change denial I heard. Still, ESG investing isn’t about saving the world; it’s about risks and opportunities, but sometimes those things align.

First off, let’s start with what ESG is and what it isn’t. ESG represents risks and opportunities for a company around its Environmental, Social, and Corporate Governance factors and the ecosystem in which it operates. ESG Investing attempts to leverage this information as an additional factor in the investment decision process.

Values-based investing is just that, or you might hear it referred to as Impact-based investing. In fact, you should be able to research and find funds to invest pretty much however you want. Want to save the world? Here is a fund that invests in those making financial concessions to be sustainable. Want to invest in your vices? There are Vice funds that invest in alcohol, tobacco, and weapons. In fact, Thematic Investing allows you to even remove moral judgment and invest in all kinds of ways.

If enough people or institutions invest a certain way, the market will move, so here’s my advice. Research and invest where you want. If you choose to ignore companies because of a perceived value judgment, that is your right, but make sure there isn’t more. With ESG, the company might understand its risks across multiple factors well. Remember, ESG risk is risk, not a moral judgment.

Also, be cautious of those turning away from ESG in this way because they are actively ignoring risk. For example, there’s no reason to go out and start a new investment firm focused on (checks notes) fundamental investing because many firms still do it this way.

In the video above, there are two things: opinions that show a surface-level understanding of ESG and three sub-fallacies:

  1. Silicon Valley and liberal elites are running the scores.
    Reality: Many data aggregators are in New York, New England, and London/EU, with many employing ex-investors (ie. those who thrive on capitalism, risk management, and returns). They are paid to provide data and insights to investors. If their research/data was terrible or not decision-useful as part of a broader analysis, firms wouldn’t buy it.
    Videos like this one contain quick company ESG score searches and then attempt to pass a moral judgment on them. At this surface-level understanding, score searches seem entirely arbitrary, so I agree that doing this is not a good strategy, which is why investors consider the scores and ESG data as part of the broader investment picture.
  2. E, S, and G factors have different weights and that contributes to their problem.
    Reality: Actually, materiality accounts for this. You won’t find material issues always weighted the same in the same industry due to an issue’s intersection with specific companies. For example, tobacco companies rank pretty high because many understand their ESG risk and are moving to health-tech solutions. Again, ESG Investing is not Impact Investing.
  3. ESG promotes ‘Woke-fads’ and cancel-culture.
    Reality: Actually, these represent real risks that surface when considering customers as stakeholders. If you act ethically or morally, you likely will find yourself shielded from these controversies. Effective management of these issues hits the Governance aspect, which has been around before ESG.

Fallacy II: Scores are how investors invest

I’ve talked to many investment firms, and I haven’t seen any who are blindly using ESG scoring to make serious investment decisions. I do see them doing two things around the scores:

  1. They leverage the scores as another factor to analyze and assess.
  2. They are trying to create their own scoring mechanism aligned to their own commitments and investment strategies.

Financial Services firms understand that a company’s complexity (ESG or not) cannot be simply represented in a catch-all score. However, I believe scores like the ones provided by the data aggregators can make for interesting discussions that could lead to appropriate risk mitigation.

Still, a score isn’t going to tell an investor in a logistics company whether their boat is leeching paint into the waterways, but it will surface other issues that may be more systemic. So a score may uncover poor board understanding of environmental issues, which could emerge in different ways (like the paint example).

Human integration with the scoring and analysis is key to ESG and often manifests in stewardship efforts. This type of engagement has existed for decades as the Capital Markets wielded their influence to manage risk.

The influence is nothing new, but the intersection with ESG issues (at the current scale and level of attention) is. This is causing heartburn for conservatives because things get done when you ‘follow the money.’ And there is a lot of money floating around ESG right now.

Fallacy III: ESG is hypocritical because Elon Musk is the savior of environmentalists, and he hates it

I was surprised by how not bananas Glenn Beck was in this particular video, but it made me wonder if anyone likes Elon Musk. It seems environmentalists don’t, but also conservatives don’t. I’m guessing the people who do are:

  1. Tesla owners or
  2. Crypto investors or
  3. People who think he’s going to give them an opportunity
  4. Bots

Personal commentary aside, Elon Musk is not an environmental savior. He is building rockets to leave the planet, to Beck’s point. He also just believes in climate change, which doesn’t make him an environmentalist. It makes him a realist. This perspective shows a genuine lack of understanding of the issue.

While electrification and the work Tesla is leading are critical aspects of sustainability, there is more to global environmental problems than Tesla can solve. Sure, he’s accelerated the transition to electric vehicles across manufacturers. Still, there are issues with lithium mining, the accessibility of Tesla, his fits and starts with solar, and the fact that, frankly, he shows no interest in the planet.

Environmentalists are the ones doing the hard work. They understand the complexity of these issues to be beyond one man and are working across companies and governments to enable long-term change.

NOTE: If you need actual proof, consider that Musk has not risked his entire fortune to fight global warming per the video. He is risking his reputation and some money to buy a social media platform.

Conservatives have found alignment to mainstream ESG concerns

Looking at ESG in a silo, focusing on the scores, and banging the pulpit on morality and financing shows a great confusion about risk.

Climate change is less deniable because severe weather events, power outages, extreme heat, flooding, wildfires, and more. These events impact people, companies, supply chains, and our ability to leverage natural resources, sustainably or otherwise. Surveys are proving this out, and the picture is grim.

Despite these sensational platitudes, there is only a small portion of the population who doesn’t believe in climate change. Aligning ESG to climate change impacts that group’s perspective and aligns to mainstream concerns that investors aren’t doing enough to mitigate ESG and climate change risk.

The result: A confusing message that you shouldn’t trust any investor or firm talking about ESG.

For ESG practitioners and sustainability experts, this can be easily dismissed as noise. I talk to companies every day who are reducing their ESG risk while also being good custodians of sustainability, diversity, and purpose. These companies have zero interest in engaging in this debate.

Still, it is worth exploring the talking points because, like other disinformation campaigns, these anti-ESG talk tracks are aligned closely enough to the recent doubts planted by Tariq Fancy (former BlackRock executive) and Chris Hohn, an activist investor.

Ironically enough, these ESG doubters are calling for more Values-based investing and chiding leading ESG firms for not doing enough on climate change while leveraging marketing to look like they are. It certainly makes for two strange bedfellows.

So my final advice is this. Investing is complex. If you want lower risk, consider an ESG investing strategy. If you want to save the world (or watch it burn), invest in Values-Based or Vice-Based accordingly. It is really up to you.