A recent PwC-sponsored article in a national newspaper proclaimed the “benefits” of employing self-styled experts in something called environmental, social, and governance (ESG) corporate disclosure. The firm warns not using their services may put executives offside with increasingly strict regulatory authorities, institutional investors, and politicians. Yet PwC’s advertorial points create more questions than answers.
First, what is ESG?
“E” stands for environment, “S” for social justice, and “G” for corporate governance. ESG funds invest in companies that oppose conventional hydrocarbon energies, embrace unionization, and promote racial and gender equity over merit in staffing and board selection. It’s essentially a back-door form of social credit scoring in which financial institutions invest in companies that incorporate an “uber progressive” left-wing policy agenda into their operations.
Mixing politics into business operations is problematic.
For instance, there are no firm standardized criteria to evaluate and “score” ESG for corporate performance. Current trends in such scoring bode ill for independent, autonomous decision-making for corporate managers, boards of directors, and shareholders.
Instead of identified codified criteria, there are a host of “stakeholder” interests and aims—mostly, but not entirely, concerning greenhouse gas (GHG) emissions and a quest for “net zero” (i.e., no carbon dioxide or methane emissions allowed without either equal elimination or absorption of those sorts of emissions). The calculation—a very crude estimation—of such emissions is difficult, and costly to do. Even then the “costs” go to consultants (usually specialized accountants), and can run into many millions of dollars, reducing profits and dividends that should flow to corporate shareholders or pension funds.
Such diminished returns might make it harder for pension plan benefits to keep up with inflation as they seek to meet the income needs of beneficiaries of their plans (retirees). Later, if shortfalls occur, taxpayers at the federal and provincial level will have to make them up. Doing so may tally billions of dollars while the national debt and interest rates are soaring.
ESG’s goal is the redirection of investment behaviour: transforming coal, oil, and natural gas as assets to the “alternatives” of wind and solar. Coerced transformation problems abound. First, investments of trillions of dollars in wind turbines, solar panels, and grid connectivity. Crucial energy storage for such intermittent sources can be very expensive, and is usually evaded when connecting to the grid. Climate models, though unreliable, do not project any future that, as of now, would be impossible to adapt to.
ESG doctrine implies that firms are irresponsible actors, polluting extravagantly and heedlessly, and committing severe crimes against staff, customers, suppliers, and the communities within which they operate, including indigenous ones. ESG advocates suspect companies engage in corrupt and autocracy-aiding practices, with managements either unaccountable and/or lavishly compensated, while insufficiently diverse in ethnic, (dis-)ability, gender, or other aspects of identity politics.
While some ESG managers are paid more than seems reasonable, boards and shareholders are increasingly getting hold of the problem. The other ESG issues are invalid. Firms obey strict laws regarding governance, fraud, accountability, bribery, and abetting dictatorships. Violating them could cost billions of dollars or even cause bankruptcy, as occurred with Enron, Wirecard, and FTX. The risks from GHG emissions or government actions to abate them are included in financial reporting, as are workplace diversity plans. Customer and community relations engagement are just smart management.
Corporate managers should not be required to make exhaustive, costly, and questionable ESG disclosure. Institutional investors acting on Canadians’ behalf should not place billion-dollar bets on ESG. Individual retirement accounts could make this problem go away, leaving account holders to put their money into ESG-oriented funds or stocks if they wish. They should not be forced to do so, now or ever.
Several U.S. states are enacting rules or laws that forbid their governments from doing business with banks or investment management firms that adhere to ESG policies. In particular, they have forbidden the pension fund or other state investment fund body from using ESG-oriented firms, and prohibit any state government agency from doing business with firms that discriminate against businesses using ESG criteria.
The largest investment management firms in the United States—Blackrock, State Street, and Vanguard—have lost billions in funds under management as a result of this. This week, Kentucky Republican State Treasurer Allison Ball put nearly a dozen financial firms on notice that they may be subject to divestment for boycotting fossil fuels.
The largest institutional fund managers in Canada are entrusted by provincial, federal, or local governments with investing the funds of working and retired employees or citizens to fully fund current and future pension income obligations. ESG-oriented funds, or related ESG investments have done especially badly recently. The companies they favour, including China-friendly ones, green energy, IT, and others avoiding fossil fuels, have cratered, whereas oil and gas firms have soared. ESG is obviously against the interests of pension plan members or the public’s informed consent.
ESG is a covert attempt to impose progressive state policy preferences on the private sector economy. It will lower pension returns and living standards. Canada’s governments and policymakers should reject this mixing of politics into corporate operations due to its many practical problems.
Ian Madsen is the senior policy analyst at the Frontier Centre for Public Policy