Corporations conducting their business habitually damage our climate, their environs, their consumers, their workers and society at large. As long as their raison d’être, the pursuit of profit, goes unchecked, enterprises will avoid bearing the external, societal cost of their activities, preferring the public to pay for the mess they leave behind.
Lawmakers and governments therefore have to step in, introducing health regulations, labour laws, competition rules, or environmental standards, for instance. They task independent regulators to police corporations accordingly. This does not always work to everybody’s satisfaction, due to underfunding, lobbying, collusion with the regulated and changing priorities entertained by policy makers.
The observation that public regulators were not quite up to the task led to the idea that investors and the invested industries themselves had to step forward and volunteer in doing good. In 2006, UN Secretary-General Kofi Annan addressed industrial leaders with his Principles of Responsible Investment. The Great Financial Crisis (2008) and the Paris Climate Agreement (2015) added urgency.
The world must not wait for governments to do the right thing. The investment industry and its managers would have to engage to make sure that money will be invested for the good of mankind, rather than for its doom. Henceforth, responsible investment will not only focus on prudent bookkeeping and profitability, but on Environmental, Social and Governance (ESG) criteria too. As per today, the financial industry has slated assets worth 80 trillion US dollars to be invested according to ESG guidelines.
If this sounds too good to be true, it perhaps is. The investment industry has to face up to a lot of contradictions on its way to benefaction. It tries to argue with superior returns generated by ESG conscious investment.
On the face of it, belching smokestacks and open pits forebode a future of diminishing returns. Coal and tobacco companies, for instance, are on a seemingly unstoppable downward path, as consumers are smoking less and prefer cleaner forms of energy. If we are ever going to tackle climate change, vast deposits of fossil fuels will remain buried, necessitating a painful depreciation of reserves already accounted for.
To equate harmful business practice with dire profit prospects is overly simplistic, though. Investment decisions should never be a verdict about current misbehaviour alone, but a wager on expectable improvement and adaptability. Farriers ran out of business irrespective of their contribution to sustainability. The promise of financial gratification for investment decisions based on the common good rather than individual profit also misses the point. Whenever we take a moral stand we value the desired outcome or the salvation of our self-esteem more than its cost.
Many ESG parameters are hard to evaluate. Accomplished gender equality in board rooms, LGBTQ+ conscious advertising, or longer holidays for better paid workers are laudable, but not necessarily profitable. Easier to calculate is the fact that ESG stocks, promoted for their goodness, tend to be more expensive, thus lowering earnings per share and diminishing future returns. Even ignoring the cost of ESG picking and screening: they are unpromising investments arithmetically.
As the theory goes, divesting from miscreants will increase their cost of capital to the point of rendering the business unprofitable. This is not true. If I sell my shares in Exxon Mobil, for instance, someone else, less scrupulous, will buy it. And if stock markets would run out of buyers, the enterprise will be taken private and continue its “harmful” activities with heightened profitability.
The current energy crisis exemplifies this with clarity. While listed corporations have heeded their investors’ demand to put less money into upstream operations, oil producers of unsavoury regimes in Africa, Asia and the Middle East rake in a fortune. They certainly earn enough money to shrug off our unwillingness to provide “capital”. They have enough income to find our position laughable, the more so as we beg them to increase production.
Should we just pass sentence on the miners while praising the battery, solar panel and wind turbine producers who are supplied by the very miners we condemn?- Andreas Weitzer
Initially I embraced ESG investing enthusiastically as yet another arrow in the quiver fighting climate change. But even before ESG had branched out to moralise every aspect of economic endeavour I realised problems.
What ESG scores should we assign to mining companies blasting indigenous sanctuaries, deluging villages, poisoning rivers and bribing government officials, while at the same time supplying us with all the cobalt, copper and lithium we need to save the planet? Should we just pass sentence on the miners while praising the battery, solar panel and wind turbine producers who are supplied by the very miners we condemn?
One of the seemingly insurmountable problems of ESG scoring was the lack of standards and the creep-in of fact-washing, a form of post-truth hovering a safe distance to outright lies. Challenged by the opacity of corporate emission disclosure, the SEC, America’s stock market watchdog, recently published a 500-page document standardising rules of emission disclosure. The SEC’s heroic undertaking demonstrates the difficulties we face when we try to legislate for good behaviour instead of directly penalising harmful emissions with mandated curbs or taxes.
The biggest flaw of ESG investment is the idea that it was possible to transform personal, moral judgements into a box-ticking exercise. In April, a couple of Yale University scholars published in the New York Times an opinion piece analysing the corporate behaviour of almost 600 companies with operations in Russia. They assigned scores on a scale of “leaving”, “scaling back”, “halting investments”, and “staying course”, deploring companies not “fully committed to ending... atrocities”.
According to their opinion, “Russians who rely on the food or medicines those companies make, or the jobs they provide, may suffer hardship. But if that’s what it takes to stop Mr Putin from killing innocent Ukrainians, that’s what business must do.” This is, like many ESG assessments, a moral judgement, and a very peculiar one for that matter. It has nothing to do with success or failure in business.
The “leavers”, ranking highly on the ESG score board of the two Yale professors, may do well in their further business endeavours. They may have realised that staying will not further their bottom line. Yet those “staying” may have equally compelling reasons to do so, independent of who will in the end have to cede the moral high ground.
All businesses are guilty of pocketing their workers’ “surplus value”, according to Marx. This is their original sin: they exploit wage-earning workers. Where we retail investors wish to draw the line is a personal decision. No ESG investment manager can relieve us from taking individual responsibility.
In the wake of the recent energy crisis many of us have started to make peace with nuclear power. Following Russia’s brazen invasion of the Ukraine, some even see the moral benefits of investing in weapon manufacturers, while condemning anything Russian: from opera singers to vodka, from Russian trollops to oligarchs.
Some schools have even started to take Tolstoy and Dostoyevsky off the curriculum. Such is our cancel culture. But even long before the invasion it would have been foolish to make a case for a Russian stock market investment. And neither was there ever one for the Ukraine. No matter how much we’d wish to favour the underdog.
To cast a harsh light on corporate (mis)behaviour is laudable. It will lead to better informed policies and may sway critical private and public investment decisions. But elucidating the public is what good journalism is about.
It’s not a role for product sales managers to wrap investment products in a cloth of morality.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com