ESG (Environmental, Social and Governance) is a risky investing fad pushed by a well-organized, self-anointed group of institutional investors and consultants where investment decisions favour companies that score well on meeting this group’s climate change, diversity and social equity targets. Ultimately, this group is pushing a social credit system that steers investment to so-called green and woke corporations.
Broadly, the group’s ESG evaluation or score seeks to ensure that investors, institutional or individual, do NOT: invest in anything that promotes fossil fuels; put money into debt, equity or real estate in firms whose products or services they, the anointed, consider to be unethical; operate in unsavoury jurisdictions; operate in unsafe, abusive, dirty or other harmful ways; do not foster or help oppressive, repressive or abusive local or national governments. Their ESG score goes up for companies that: recruit, train, mentor, develop and promote less-advantaged people; engage constructively with local communities, employees, and fairly use local resources or land; and, finally, do not operate monopolistically or otherwise abuse economic, commercial or market strength or dominance.
That may sound relatively simple: find stocks of firms operating cleanly and ethically according to some standard. However, in practise, it is far more complex. After eliminating the anointed’ s favorite targets – defense contractors, gun makers, oil and gas, tobacco, coal miners and coal-fired utilities, there are yet far more firms that could violate ESG edicts.
First, there are suppliers of equipment to the previously noted firms: heavy equipment, including construction machinery; forestry and related firms; any and all companies making vehicles that burn fossil fuels; all companies operating in corrupt, repressive, violent or criminal jurisdictions (over a hundred nations, globally); all bonds issued by those firms, and those unsavoury nations; all pipelines that transport gas or oil; any mining firms that despoil the earth, which, generally, means all of them; all agricultural-related firms, since they engage in or indirectly support practices ESG devotees consider unsustainable.
Then there are all firms which have suppliers in repressive countries such as China, or where democratic or religious liberty is at risk, such as India and Vietnam (a favoured place for those trying to reduce reliance on China) and their clothing and other labour-intensive textile-related manufacturers.
Then we could finish off in the tech sector with all firms using big server farms which are consumers of huge amounts of climate-unfriendly energy; and finally, all big software firms, as they abuse their market dominance and threaten pluralistic democracy and freedom of expression.
Nearly all human action, and commercial activity, will, at some stage, do something that these anointed groups – someone, somewhere, somehow, considers actually or potentially hazardous, dirty, or unethical, or does its activity in a not-sufficiently ‘sensitive’ fashion with respect to its employees, the community wherein it operates, or to its customers and suppliers. It will also not have full control or knowledge of what or how its suppliers do or operate. True, pure ESG investing would result in few, if any, investments at all.
Even developed nations may violate opaque ESG standards. Anointed critics now highlight the supposed ill treatment of indigenous peoples in Canada, the United States and Australia, and the poor welcome accorded refugees, asylum seekers and others in nearly all OECD nations.
Purity and nobility taken to an impractical extreme ultimately come at a price: an impractical, economy-wrecking mess.
Ian Madsen is the senior policy analyst at the Frontier Centre for Public Policy
