All the noise over ESG has become a horrible distraction, but there is increasing resistance, as some states have begun to pull out of the ESG model, however, but it easier said than done. The problem with it is that it is an extra layer of bureaucracy, a proxy approach that can be fooled, as was shown by the fact that FTX had a high ESG rating, but it turned out to be a total fraud.
A lot of thoughtful criticism of ESG-investing has emerged, and makes a good read for those who want to think this through. ESG becomes merely another bureaucratic tool of ticking the boxes, and to that extent it represents just more paperwork and is not productive, since it cannot be the guarantee of good practices that it pretends to be. It just makes pretending easier. Some examples:
- This article from the American Institute for Economic Research makes it evident how ESG can confuse matters severely to the point that many ESG-investment funds are underperforming their non-ESG peers. When you reduce complex issues to just a bunch of parameters, you merely create an environment where people pay lip service to those parameters at the expense of performance, and meanwhile the ESG practice adds cost to the business on all levels including higher management fees in ESG funds. Meanwhile, there is so much fuzz in the standards, that the exact meaning of ESG is not always clear and there is an argument to be made that ESG becomes a distraction from performance in many businesses.
- Yuri Bezmenov posted a hilarious substack, “How to Boost your ESG Score (QUIZ + CONTEST)” he opens up by citing how FTX had a higher ESG score than Exxon and Exxon in turn had a higher ESG score than Tesla. He includes a priceless quote from NYU Prof. Aswath Damodaran, saying:
I find the purveyors of ESG to be among the most sanctimonious and arrogant twits (and you can quote me on that) on the face of the earth, convinced that they have the right definition of good, that they will thrust down the throats of everyone else. The ESG measurement services, in my view, are a charade, measuring neither goodness nor risk, but they have real effects, since companies take consequential actions to improve these scores.
In other words, it becomes a distraction from good business.
- In another substack Jefffrey Peel argues for a return to Capitalism by Defeating the ESG Movement, and observes that a market correction will tend to flush out these abusive distortions.
None of the above is meant to argue that some of the values that inspired ESG may not be worthwhile, but merely that this type of parametric pretense is not going to get us there. The profit motive all by itself clearly tends to drive to excesses, but good shareholders should seek to mitigate that, for abusive practices will eventually catch up with you. There are better ways. Let’s hope we return to sanity soon.
For actual retrofit projects we turn to CAPM, the Capital Asset Pricing Model, and we note that retrofits are intra-marginal investments with generally high alpha (gain) and low beta (risk), the only meaningful risk being the fluctuations in available energy prices.