ESG: "The Devil Incarnate"

[Doc]

https://www.youtube.com/watch?v=-Cw27U1524A

-Cw27U1524A

Mod note. ESG: Environmental, social, and [corporate] governance

[Typhoon]

FT | There is far too much groupthink in ESG investing [paywalled]

Definitions are at once so fluid and so rigid as to be almost nonsensical

Merryn Somerset Webb 15 HOURS AGO

The writer is editor-in-chief of MoneyWeek

Edinburgh has a new Library of Mistakes — a financial library devoted to helping us all learn from the disasters of the past. Over the past week it has been running a series of events designed to discuss those disasters.

Wednesday was devoted to the mistakes of fund managers. There have been a few. Some brave managers told us of their awful stock picks (Northern Rock loomed large). But the real mistakes were ones of wider groupthink and the over-enthusiastic embrace of shifts in investment thinking — believing in the ability of the internet to support any valuation going in the late 1990s, or in the new paradigms on offer just before the financial crisis, for example.

What was not discussed was the huge mistake today’s fund managers are making: the fervent embrace of the idea that investing according to environmental, social and governance principles is both a good thing and something that guarantees long-term outperformance.

One of the most extraordinary things about this is the speed and zeal with which it has been adopted — despite the data being too short-term for any reliable conclusions (money only started to flow into ESG strategies in real volume in 2015), and the definitions of what counts as ESG being simultaneously so fluid (there is much regulatory movement, but still no set of universal standards) and so rigid (everyone creates their own standards and adheres to them via a strict box-ticking regime) as to be verging on nonsensical.

Take Twitter as an example. You can look up most companies online and see an ESG rating for them with Sustainalytics. Twitter is rated 19.4. This means it ticks a lot of boxes and is therefore a “good” investment. No surprise, then, that it turns up in most ESG exchange traded funds.

But stop to think about this, just for a second. The fuss around Elon Musk’s takeover of the company centres in large part on free speech concerns — and his apparent full embrace of it. This should be a reminder that Twitter hasn’t been much of a supporter of free speech over the past few years — just ask anyone who deviates from what its moderators consider acceptable views on, say, vaccine efficacy or gender ideology, or indeed Donald Trump.

It might also be a reminder that free speech is not just a good thing in theory but an essential driver of equality, democracy and, perhaps, of successful capitalism. Let’s not forget, writes Jacob Mchangama in his book Free Speech, that in allowing everyman to challenge the elite, “free speech may well be the most powerful engine of equality ever devised by humankind”. If you really believe in democracy and equality — and the S in ESG — do you want to be invested in a company that messes with that? Of course you don’t.

You might even ask why there isn’t an H for human rights in the whole thing (EHSG, anyone?). You can pull out a good percentage of the companies in the average ESG portfolio and make a similar argument.

Still, maybe you don’t mind pretend do-goodery if your box-ticking is sure to make you money. But it isn’t. The average ESG fund has not had a pleasant 2022 so far, thanks to the underperformance of the growth stocks that make box-ticking easy against the oil and mining firms that definitely do not.

Meanwhile, a recent paper from researchers at the University of Chicago was unable to find any evidence that “high sustainability funds” outperform low sustainability funds. Indeed, perhaps the opposite is the case: there is some evidence that companies focus on ESG to cover for poor business performance.

The strategy has also proved itself to be fairly worthless as a risk indicator (one of its great selling points is supposed to be that, if done correctly, it at least highlights the future risks to a company). Yves Bonzon, group chief investment officer at Julius Baer, who I suspect is something of an ESG apostate, notes that “prior to the outbreak [of war] average ESG ratings for companies with extensive operations in Russia were higher than those of their peers without such exposure”.

Even in March this year, say Amati Global Investors, Refinitiv, a representative ESG scoring provider, was giving Rosneft, the Russian oil group, a significantly higher ESG rating than Serica — a North Sea company providing 5 per cent of the UK’s gas supply. Lots of boxes ticked. No value gained. Whoops.

Perhaps, says Bonzon, it is time for investors to “grasp that ESG is not about achieving systematic outperformance”. Its merits lie elsewhere, he notes. “It can be a useful tool for investors to express their values in portfolios and hence derive additional non-monetary benefits from investment activity.”

Thoughtful observers will not be convinced by this bit either (think back to the problem of figuring out what and how to measure). But in any case, what 2022 has brought so far is some pretty strong hints that the idea that ESG is some kind of investing win is dead. Continuing to invest as though it were a big win is going to create the need for many new bookshelves in the Library of Mistakes. It is time for investors to stop ticking and start thinking.

[Doc]

FT | There is far too much groupthink in ESG investing [paywalled]

Definitions are at once so fluid and so rigid as to be almost nonsensical

Merryn Somerset Webb 15 HOURS AGO

The writer is editor-in-chief of MoneyWeek

Edinburgh has a new Library of Mistakes — a financial library devoted to helping us all learn from the disasters of the past. Over the past week it has been running a series of events designed to discuss those disasters.

Wednesday was devoted to the mistakes of fund managers. There have been a few. Some brave managers told us of their awful stock picks (Northern Rock loomed large). But the real mistakes were ones of wider groupthink and the over-enthusiastic embrace of shifts in investment thinking — believing in the ability of the internet to support any valuation going in the late 1990s, or in the new paradigms on offer just before the financial crisis, for example.

What was not discussed was the huge mistake today’s fund managers are making: the fervent embrace of the idea that investing according to environmental, social and governance principles is both a good thing and something that guarantees long-term outperformance.

One of the most extraordinary things about this is the speed and zeal with which it has been adopted — despite the data being too short-term for any reliable conclusions (money only started to flow into ESG strategies in real volume in 2015), and the definitions of what counts as ESG being simultaneously so fluid (there is much regulatory movement, but still no set of universal standards) and so rigid (everyone creates their own standards and adheres to them via a strict box-ticking regime) as to be verging on nonsensical.

Take Twitter as an example. You can look up most companies online and see an ESG rating for them with Sustainalytics. Twitter is rated 19.4. This means it ticks a lot of boxes and is therefore a “good” investment. No surprise, then, that it turns up in most ESG exchange traded funds.

But stop to think about this, just for a second. The fuss around Elon Musk’s takeover of the company centres in large part on free speech concerns — and his apparent full embrace of it. This should be a reminder that Twitter hasn’t been much of a supporter of free speech over the past few years — just ask anyone who deviates from what its moderators consider acceptable views on, say, vaccine efficacy or gender ideology, or indeed Donald Trump.

It might also be a reminder that free speech is not just a good thing in theory but an essential driver of equality, democracy and, perhaps, of successful capitalism. Let’s not forget, writes Jacob Mchangama in his book Free Speech, that in allowing everyman to challenge the elite, “free speech may well be the most powerful engine of equality ever devised by humankind”. If you really believe in democracy and equality — and the S in ESG — do you want to be invested in a company that messes with that? Of course you don’t.

You might even ask why there isn’t an H for human rights in the whole thing (EHSG, anyone?). You can pull out a good percentage of the companies in the average ESG portfolio and make a similar argument.

Still, maybe you don’t mind pretend do-goodery if your box-ticking is sure to make you money. But it isn’t. The average ESG fund has not had a pleasant 2022 so far, thanks to the underperformance of the growth stocks that make box-ticking easy against the oil and mining firms that definitely do not.

Meanwhile, a recent paper from researchers at the University of Chicago was unable to find any evidence that “high sustainability funds” outperform low sustainability funds. Indeed, perhaps the opposite is the case: there is some evidence that companies focus on ESG to cover for poor business performance.

The strategy has also proved itself to be fairly worthless as a risk indicator (one of its great selling points is supposed to be that, if done correctly, it at least highlights the future risks to a company). Yves Bonzon, group chief investment officer at Julius Baer, who I suspect is something of an ESG apostate, notes that “prior to the outbreak [of war] average ESG ratings for companies with extensive operations in Russia were higher than those of their peers without such exposure”.

Even in March this year, say Amati Global Investors, Refinitiv, a representative ESG scoring provider, was giving Rosneft, the Russian oil group, a significantly higher ESG rating than Serica — a North Sea company providing 5 per cent of the UK’s gas supply. Lots of boxes ticked. No value gained. Whoops.

Perhaps, says Bonzon, it is time for investors to “grasp that ESG is not about achieving systematic outperformance”. Its merits lie elsewhere, he notes. “It can be a useful tool for investors to express their values in portfolios and hence derive additional non-monetary benefits from investment activity.”

Thoughtful observers will not be convinced by this bit either (think back to the problem of figuring out what and how to measure). But in any case, what 2022 has brought so far is some pretty strong hints that the idea that ESG is some kind of investing win is dead. Continuing to invest as though it were a big win is going to create the need for many new bookshelves in the Library of Mistakes. It is time for investors to stop ticking and start thinking.

Indeed, perhaps the opposite is the case: there is some evidence that companies focus on ESG to cover for poor business performance.

Bingo !! There have been many such schemes over the years. ROHOS ISO9000/9001 Banning of CFC's and dare I say "Global Warming" Some have some merit. Others are pretty much complete scams.

If the real intent was to grade Big Corporations on their non financial benefits to society there would not be a single number. For example if you wanted to grade Big Corporations on their environmental record there is a record that can be quantified as to how they have performed in the past. BP PLC for example is rated at 35.2 Where other Oil companies that have cause much less in terms of environment disasters are in the 50's

But another example that may be more to the point is CFCs Don't get me wrong The ozone layer is extremely important. Depletion of it is a very serious issue.

But the way the ban came about was pretty corrupt just the same. Dupont owned the patent on CFCs It was about to run out. The next cheapest substitution was also patented by Dupont. SO before their patent ran out that went to congress and made the case that CFCs were destroying the ozone layer. Got it banned then they benefited from another 20 years of owning the cheapest replacement. Also ozone happens to be one of the dirtiest industrial gases out the at the Earth's surface It is the cause of most smog. Breath too much of it and you pass out.

[noddy]

bring it on.

the more environmental monitoring, the better - stick a sensor in everything.

(*) spoken as a provider of such sensoring.

[Doc]

bring it on.

the more environmental monitoring, the better - stick a sensor in everything.

(*) spoken as a provider of such sensoring.

That is the rub. The big corporations aren't going after the "E" in ESG They are going after the "S" and "G" The "E" is something that can be quantified. Which I suspect is why they go after the "S" and the "G" which both contain a huge BS factor. But it is mostly the "S" they go after. It is rather surprising to me that a company like BP has such a bad score in corporate governance because non transparency. Their "G"scores are so low it sounds like a scam. But the company that flooded the Gulf of Mexico with oil because it was in a hurry having a slightly less than moderate ESG is ridiculous.

The "E" score could be based on government fines and court rulings against a company. I think the "S" in particularly is meant as honey to get big corporate CEO's to play along. IE ESG do not belong together in the same rating. This is where all the corporate "Woke" nonsense comes from.

[Nonc Hilaire]

ESG is just another centralization of power moving towards totalitarianism.

[Doc]

ESG is just another centralization of power moving towards totalitarianism.

It is classic Fascist control of corporations.

[Nonc Hilaire]

ESG is just another centralization of power moving towards totalitarianism.

It is classic Fascist control of corporations.

Corporations are fascist creatures. A fiction designed to let fascists legally evade responsibility.

Schwab’s, “You will own nothing …” is precisely why corporate persons get rich but living people are poor. The illusory corporation is the owner, but the directors of the corporation control and enjoy without ownership.

[Nonc Hilaire]

ESG is just another centralization of power moving towards totalitarianism.

It is classic Fascist control of corporations.

Corporations are fascist creatures. A fiction designed to let fascists legally evade responsibility.

Schwab’s, “You will own nothing …” is precisely why corporate persons get rich but living people are poor. The illusory corporation is the owner, but the directors of the corporation control and enjoy without ownership.

[Doc]

ESG is just another centralization of power moving towards totalitarianism.

It is classic Fascist control of corporations.

Corporations are fascist creatures. A fiction designed to let fascists legally evade responsibility.

Schwab’s, “You will own nothing …” is precisely why corporate persons get rich but living people are poor. The illusory corporation is the owner, but the directors of the corporation control and enjoy without ownership.
[/quote]

So are labor unions now that you mention it. Back in the 70's and 80's American labor Unions got to the point of diminishing returns. The way union presidents got elected up until that point was ever increasing pay and benefits for its members.

Big corps did that same thing starting in the 1990's delivering share holders bigger and bigger returns. Now they have gone woke and many of them will go broke. While it does allows follow if their customers are unhappy the shareholders will be unhappy (look at Microsoft for example) If the Customers are so unhappy they stop buying products the share holders will certainly be unhappy. The audience for ESG is the share holders and potential share holders. But it is telling that the man credited with starting ESG is heavily invested in Sino petroleum. One of the worst rated of ESG corporations in the world.

[Nonc Hilaire]

True about labor unions. They started out well, but were quickly corrupted and co-opted.

[Doc]

True about labor unions. They started out well, but were quickly corrupted and co-opted.

In labor Unions back then, and like the big corporate investors now, it was about demand for returns exceeding supply. Investors demand maximizing returns. So is labor. You don't see people demand less pay or the same pay. It is always more pay. Same with investors. They can't just look down and see a red line on the tachometer so they know when to let off the gas.