MANY of you will have come across the terms ESG and ESG investing, but what are they?
ESG stands for environmental, social and governance.
“Environmental, social and governance investing is a strategy investors can use to put their money to work with companies that strive to make the world a better place.”
But who decides what behaviour is good and bad, and what makes the world a better place?
“ESG investing relies on so-called independent ratings that help investors assess a company’s behaviour and policies when it comes to the environment, social impact and governance issues.”
Anyone old enough to remember the independent ratings agencies that put double-A and triple-A ratings on the subprime bonds that crashed the global banking system back in 2008 will not fail to raise an eyebrow at that.
The three criteria used to evaluate companies for ESG investing are:
- Environment. What kind of impact does a company have on the environment? This can include a company’s carbon footprint, toxic chemicals involved in its manufacturing processes and sustainability efforts that make up its supply chain.
- Social. How does the company improve its social impact, both within the company and in the broader community? Social factors include everything from LGBTQ+ equality, racial diversity in both the executive suite and staff overall, and inclusion programmes and hiring practices. It even looks at how a company advocates for social good in the wider world, beyond its limited sphere of business.
- Governance. How does the company’s board and management drive positive change? Governance includes everything from issues surrounding executive pay to diversity in leadership as well as how well that leadership responds to and interacts with shareholders.
The big problem here is that any measurement of these criteria to evaluate companies for ESG investing and calculate a rating is likely to be highly subjective.
For example, Microsoft has an ESG score of 76.3, which is the highest ESG rating in the world. Yet this year Microsoft was involved in a scandal based on sexual harassment and gender discrimination, and the company ordered a review into its sexual harassment policies. A whistleblower also accused the company of paying hundreds of millions of dollars in foreign bribes to governments and clients in Africa and the Middle East.
So when it comes to Microsoft’s glowing ESG score, the ‘governance’ part seems to have been underplayed or even overlooked.
And when the S&P500 placed the oil giant ExxonMobil in its top-ten best in the world for ESG, at the same time placing it above Elon Musk’s electric car outfit Tesla, Musk took to Twitter to call ESG “a scam” that had been “weaponized by phony social justice warriors”.
Sour grapes, perhaps, but others in the investment world agree. Chamath Palihapitiya, the founder and CEO of venture capital firm Social Capital, has called ESG investing a “complete fraud” and many other fund managers have echoed his sentiments.
There are plenty of other inconsistencies that come from judging what sort of business activities are worthy of investment in an ESG world.
Gina Miller’s SCM Capital states its ESG funds do not invest into adult entertainment, even though arguably it is an industry that is currently being liberated by women with control being transferred from male-owned to female-owned outlets. At the same time the UK taxpayer has invested into Killing Kittens – which means the British public owns 1.5% of one of the adult entertainment industry’s biggest sex parties – when such an investment is held to be way below Gina Miller and SCM Capital’s standards.
Many of the same funds that look down on the idea of putting capital into adult entertainment will happily invest in the convenience food industry – which indirectly kills millions of people through health ailments linked to bad diet – and in companies that manufacture throw-away retail products with a significant pollution profile.
So the world of ESG is riddled with contradictions and double standards. It gives investors a sense of self-satisfaction and makes them feel they are “doing good for the world”, but the more you dive into ESG the more you can sympathise with those who argue it is a fraud and a scheme for corporations to launder their reputations.
Going woke can be good for business
It appears ESG is now being used as an instrument to win over the socially conscious and liberal left-leaning within society, an audience of hundreds of millions of people. Being woke can be divisive, but it can also be an effective way to rebrand a company – especially if that company wants to target the under-40s market.
Don’t think of woke or ESG as terms or a scheme, think of them as instruments.
A good example of this tactic comes from Ben & Jerry’s, which embarked upon a PR-stunt that rebranded the company as woke by ending sales in the West Bank and calling out the UK government on its immigration policy (the Cone Together Campaign).
The reaction of many traditionalists and right-leaning people, who slated the company for being “woke”, played right into the company’s hands because it indirectly rebranded itself among hundreds of millions of younger people who are socially conscious. Suddenly hundreds of millions of millennials and gen Zs were rooting for and backing the company, and the advertisement Ben & Jerry’s received was immense.
The result was a stunning success: Ben & Jerry’s brand sales for 2021 increased 9% and outpaced the parent company’s underlying sales of 4.5%. So much for “Go woke, go broke”.
Others will no doubt attempt to ride the trend, but when it comes to businesses and ESG my stance is simple: be wary of wolves in woke clothing.
