The adoption of Environmental, Social and Governance, ‘ESG’, standards by institutional investors is meant to cajole, if not compel, investible companies to adhere to rigid rules and criteria established by investors or outside entities, such as consultants to satisfy so-called climate change and diversity and social equity targets – ultimately a form of woke and green social credit scoring for corporations, if you will. Never mind that these are controversial and disputed topics; it has all become a mess.
The first problem with ESG is the lack of firm, objective, and uniform standards, criteria and targets or goals: there is no agreement among ESG ‘raters’ about how to rate firms on ESG standards. The ‘E’ in ESG is essentially anti-fossil fuels.
Yet one firm may be rated highly anti-fossil fuels by one evaluator, but disqualified or low-ranked by another. For example, Tesla Inc., which makes electric vehicles, ‘EVs’, and has a solar energy division, would seem to be a candidate for a high ‘E’ score, while ExxonMobil, a huge oil and gas producer should have a low score. Nonetheless, Tesla’s ‘E’ merits did not count for much for one rater, versus the supposedly higher ‘G’ scores of the oil firm.
Pulling back to the global level, nearly every firm working in China uses electricity generated by coal. Hence, they should have a low ‘E’ score, and not be investible by Western devotees of ESG standards, but they are still eligible. Chinese companies producing or refining the minerals that go into solar panels, wind turbines and electric vehicle batteries are notoriously sloppy and dirty in their operations, producing air, water or soil contamination. Yet they are still eligible.
Indeed, all firms active in China likely are ineligible on ‘S’ (social) or ‘G’ (governance) grounds, as China is a brutal dictatorship that abuses its own citizens; a land where rule of law is arbitrary, subjective and selectively applied. Not to mention the genocide of minorities in China, suppression of dissent and oppression of religion.
Further making the ‘E’ criterion suspect are the resources involved in making solar panels, wind turbines, EV electric motors and batteries. Solar panels require large amounts of purified silicon, rare metals, and aluminum. Wind turbines use synthetic materials for their enormous blades, and rare metals for turbine power generators. Electric motors and batteries require all of those things. Mining and refining silicon and rare elements requires copious diesel fuel and electricity, the latter often derived from fossil fuels. The result: air pollution and, separately, carbon dioxide emissions.
Synthetic materials are made from petrochemicals, and the transport and assembly of the components of these things requires more energy, little of which coming from renewable or low-CO2 emission sources. Finally, the disposition of these materials after their useful life, which can be fewer than thirty years, creates more waste and potential contamination – these products cannot be cheaply disassembled and recycled. Also, transporting all of these things around, and installing them, uses even more energy.
Another troubling fact from the ‘Green Transition’ movement that is dangerous for the economy, businesses, national security, and for ordinary individuals and households is the superficially ‘low’ cost of renewable energy touted by its advocates. Their ‘levelized cost’ does not include the cost of the energy storage, typically pumped-hydro or batteries, the crucial safety buffer when there is no sun or wind is inadequate. This deliberate evasion has been very damaging.
That dire weather situation memorably occurred in Germany when the North Sea wind arrays were insufficient to power the nation for weeks at a time. The over-reliance on renewables has cost Germany its energy independence, as Russian gas became the (non-)safety buffer that wind and sun could not provide. The result is dangerous Moscow dependence, and Russia now at war with Ukraine. California and Texas have also been hurt by blind adoption of alternative energy.
Ultimately, ESG social credit scoring delivers lower returns than the market, meaning less capital formation, economic growth-harming capital misallocation and smaller pension returns.
