The Good, the Bad and the false. Addressing 9 arguments against ESG

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I tend to see versions of these a lot these days. Most arguments against ESG or Responsible Investing fall into one of: strawman, false dichotomies, what-about-ism, performative, perfect-gets-in-the-way-of-the-good or sometimes just outright disingenuous. Many are simply a cover for “this breaks my model of how the world ought to work, so I’m not going to engage with it”. But there’s grains of truth here too, and questions that deserve to be asked and answered fairly. Here we go:

  1. It’s Greenwashing

It’s all marketing, spin, rubbish, empty claims, just for show, snake oil. Net Zero targets will fall over and the whole thing will collapse like a house of cards. Now, some truth to this. There IS a lot of greenwashing (and greenwishing), but for every greenwasher there’s a company approaching the endeavour in good faith, and it pays to be able to tell the difference. Many Net Zero targets ARE bound to fall over, but some won’t, wouldn’t it be nice to try and know the difference? Might even be quite important to investment performance? Let’s not let the perfect get in the way of the good. To my mind this is really an argument for MORE focus on ESG not less, to get into all the tricky details and try to sort the hype from the reality – isn’t that what we spend so much of our time doing as investors anyway?

Rejecting ESG because of greenwashing is like rejecting the whole idea of investing because some companies are frauds.

2. It’s a bandwagon, it’s hype.

Or, put another way, it’s turned into a powerful and popular social and cultural movement. One of the big macro mega-themes of our time. I have some sympathy for why some people feel it’s like a bandwagon but this isn’t a reason to reject it, the opposite in fact. As investors, surely it pays to properly understand such a broad movement? I could argue that it’s precisely because something turns into a bandwagon that investors SHOULD take note of it. The same people who dismiss it as a bandwagon today were often the ones dismissing it as a fringe movement a few years ago, so you can’t have it both ways.

Rational and thoughtful investors surely can look beyond hype , if we didn’t we’d have dismissed an awful lot of good things on those grounds over the years: the internet? E-commerce? Social media? Electric cars? You don’t have to look too hard to begin to grasp that if even half of the Net Zero plans come to fruition we are looking at probably the biggest flow of capital we will see in our lifetime – you telling me that’s not something worth getting on the investment agenda?

A deeper point here is that this is a movement where collective action is at the heart of things, but this conflicts ideologically with how some people operate. Those of a certain political stance will reject outright anything that smells like collective action because they think it’s socialism. It’s time to put dogma to one side and consider this on its merits. Finally, there is one category of individual here who seem to believe so deeply in their own exceptionalism that they reject the idea of participating in any kind of broader movement. Again, consider things on their merits here, don’t be that person.

3. It’s empty, lacking in substance.

I was disappointed to see Aswath Damodaran – whose work I otherwise have a lot of time for – putting forward this argument in a recent interview. It’s performative, playing to a crowd and doesn’t stand up to any scrutiny, I’m afraid. Why not take a look at the Net Zero Investing Framework, the 224-page IEA Net Zero pathways report, check out the Transition Pathway Initiative tool, ShareAction’s list of top AGM contests for investors to watch or the latest reports from Climate Action 100+ and ECIU, or the work by ESMA on climate related benchmarks. Analysing the relative performance of ESG stocks is almost an entire academic genre all by itself: the recent paper by the NYU Stern business school was a meta-study of over 1,000 other papers. There is no lack of substance here, it’s just that some choose not to engage with it.

4. It’s all priced in.

I have some sympathy for this argument because at least it places it in a rational framework which we can have a sensible debate around – that of pricing and market efficiency. Die-hard efficient-markets types may try to argue that envrionmental and social factors are already fully priced in, so what can you do, but I would say, how could they possibly be? These are long-horizon, systemic issues that break almost every single model that people in investing use. The market often fails to properly price next year’s earnings, let along something slow-moving that’ll take decades to fully materialise, overlaid with the uncertain reaction-function of governments and markets.

By all means, let’s do more work here to better understand whether things such as the existence of Science-Based targets are good predictors of stock market performance, lets do the work and keep the hypothesis under review. At some point it is quite likely that it will be priced in (indeed, that’s a large part of the argument behind the need for ESG investing). but jumping straight to the conclusion that it is priced today is not good enough, for me, and not it seems for the Bank of England who recently stated:

But there is increasingly persuasive evidence that market prices materially under-estimate the risks and the opportunities associated with the transition to net zero.

Bank of England May 2021

5. The data isn’t robust enough to base investment decisions on

Again, a grain of truth here, but a need to get real. Yes, the data on ESG factors is not perfect, although it is improving all the time. But since when did we insist on perfect data in investing before doing anything? Surely investing is nothing if not the art of figuring sh!t out in the presence of messy, incomplete and conflicting data? Yes, different data providers have different ESG assessments of different companies, GET OVER IT ! That’s as it should be! You expect every analyst, every research provider to agree on every stock? It takes two views to make a market, always has, always will.

6. We should leave it to the government to regulate, it’s not investors concern

In an ideal world, I have some sympathy for this argument, but we don’t live in an ideal world. It’s partly right of course, governments are PART of the answer, a very big part. But the ESG movement emphasises the power that shareholders have in influencing corporate behavior. Don’t wait for the government to regulate, if you’re a shareholder you can demand change now.

To get a little philosphocal here for a second, we don’t live in an autocracy where government has absolute power over things. In our system individuals have collective power alongside government, companies have power, shareholders have power. That’s how it works (look I don’t make the rules ok! ).

I would have thought it’s fairly clear here in 2021, that we have a good half century of evidence that market regulations stop woefully short of curbing the worst behaviors of companies heaping external costs on the enviornment and communities in pursuit of profit: the tragedy of the commons a thousand times over. Whether we look at big tobacco, Du Pont chemical, tailings dams, recent history is littered with examples. It ought to be clear that regulation is always playing catchup, and regulatory capture is a thing, which entrenches the status quo in favour of powerful corporations.

A large part of this line of thinking can be traced directly back to Miltion Friendman’s famous 1970 essay on the role of a corporation being to focus solely on profit maximisation for shareholders. This doctrine really is from another time, and there have been several powerful rebuttals of this in recent times notably by the Said business school and the CFA institute (“Capitalism for everyone”).

Things like ESG and RI investing, and CSR needed to be invented and to exist in order to balance things back in favour of broader stakeholder considerations, to try and ensure companies were held accountable for the cr*p they pumped out, the wages they paid their staff and the impact they have on communities. But despite that these un-costed externalities that have been the core failure of the market-driven paradigm have built up to serious systemic financial risks now. Not just climate, but on social and wider environmental levels too.

Companies are living, breathing things that have real-world impact, not numbers in a spreadsheet, as some would have. So it’s great that these are finally getting a proper airing and a reckoning (and it’s not governments doing it). In just one more example of this the business roundtable of America in 2019 re-defined the purpose of a corporate to “promote an economy that serves all Amercians”.

There’s often an inconsistancy at the heart of this argument too. Anyone insisting that government should come along and regulate all of this presumably ought to have a clear view on what the right carbon price is, whethere a tax, a cap and trade or an ETS is the best route for pricing and regulating carbon emissions. One would think they also routinely vote for politicians pushing a regulation-heavy agenda. Usually it’s the opposite, the people making this argument are often libertarians at heart, who energetically oppose regulation the rest of the time – you can’t have it both ways. If you’re a libertarian arguing for regulation to solve it, it’s a smoke screen to avoid engageing with the issues.

7. Windfarms and Tesla are bad investments! They could be in a bubble! And they pollute too!

This really mis-understands what ESG is about – which is properly assessing the risks that go along with the environmental and social impact that companies have. Thinking about the cr&p that companies pump out, whether they pay their people a decent wage if they exploit communities, and if they are thinking strategically about the big issues of our time (among other things). It is not about presenting one, single portfolio and saying “invest in this”!

Yes, some asset managers use it to market funds full of renewable energy assets, and of course these have their issues and could easily turn into bubbles. But fundamantally this approach to investing is not about jumping to one asset or asset class as a solution. Think of it more like factor investing (growth, value or quality). Don’t see many people worrying about value managers all doing the same thing.

This pushback argument is more of a smokescreen put up to avoid getting into a real discussion.

And wait, if there’s one enduring meme that triggers investors like no other it has to be the bubble. It’s partly fair – bubbles do exist and can be very damaging. But what’s easy to underappreciate is how dynamic and adaptive markets are – it’s like back in 2006 plenty of people said there weren’t enough government bonds to satisfy demand from pension funds hedging their liabilities. That was strictly true at that time, but of course the market has now grown hugely. Supply comes to meet demand too.

8. But there are all these contradictions! My head hurts! Explain them to me! Now!

Some companies have great governance but shoddy environmental practices, some the reverse. Some transition enablers pollute – elements for batteries are frequently mined in emerging markets with bad practices and awful working standards. I often see single data points like this held up like an “aha” gotcha kind of moment , when really they mean very little. What you don’t think unresolved contradictions abound in investing ?? Can you make complete sense of AMC, GameStop, Bitcoin or Dogecoin? What about Tesla, or even Amazon or Apple come to that. Value investing , negative bond yields , QE . The investment world is full of weirdness that can’t be easily explained and if you insist on the world submitting to nice clean explanations you’ll be waiting a long time.

Pushing back on ESG because something doesn’t make sense is like rejecting investing because you can’t explain GameStop.

9. You want to turn companies into charities, and churches!

This was part 2 of professor Damodaran’s tirade on the interview I linked earlier. It’s just a false dichotomy from someone who clearly hasn’t spent any time getting to grips with what ESG investing is all about. There’s a long way between a solely profit-maximising Freidman-esque corporation and a charity, and a more informed debate about where companies should be and the stakeholders they serve seems well overdue. That’s the very pertinent question that many people are asking. Let’s have a sensible debate about it rather than dimissing it with a weak strawman.

9. WTF! There are so many acronyms, I can’t cope!

You laugh but I do hear various versions of this. Yes, there are a tonne of acronyms in this area, but that’s true of investing in general and … well, come on, be better 🙂

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