ESG’s Foundation of Sand

ESG’s Foundation of Sand

The other day, courtesy of the nice folks at As You Sow, we read a defense of ESG penned by John Tobin, a professor of practice Cornell’s SC Johnson College of Business and a former Managing Director and Global Head of Sustainability at Credit Suisse.  It was weird.  For some reason – fundraising, we suppose? – the business school put out a press release citing Tobin on the recent passage of legislation by Congress to prevent the Labor Department from implementing its new rule allowing ESG investments in ERISA-governed pension plans.  Tobin said the following:

“The notion of socially responsible investing, or ESG investing, got started many decades ago with church leaders seeking to align their churches’ investments with their religious convictions, excluding gambling, alcohol, armaments, and other ‘sin stocks’.

“If ESG opponents wanted to stop any consideration of environmental or social issues in investments, they should have started a long time ago—that train has left the station. Today, executives at just about every major company consider and manage ESG issues—and to not do so would pose big reputational and litigation risks and endanger their social licenses to operate. Not evaluating and managing ESG is just no longer an option.

“Maximizing risk-adjusted returns on investment and protecting the environment are not mutually exclusive. Anyone suggesting that has apparently never heard of a company called Tesla….”

Like we said, weird.

There’s a lot to break down in this short statement, and for reasons that will be clear momentarily, we’re going to work backward, from the bottom up.

So, here’s the thing.  We’ve heard of that company called Tesla.  We know, for example, that it makes electric cars, that are good for the environment – unless, of course, you happen to be a boy who lives in the Congo and are, essentially, enslaved for the purpose of mining cobalt for the Chinese battery manufacturers who are integral to the electric car industry.  Then, maybe, the environment ain’t so great.

We also know that Tesla is one of the classic examples of ESG’s contradictions.  We know that Tesla is, in fact, poorly rated by many ESG ratings services.  We know that the founder of Tesla loathes ESG and has called it “the devil incarnate.”  We know that last year, S&P dropped Tesla from its ESG index because it didn’t think the company (that makes electric cars and ONLY electric cars) has a solid “low-carbon strategy.”

So…uh…yeah.  We know about Tesla, Professor Tobin, but hopefully, you’ll forgive us for asking: do you?

Tobin also says that “If ESG opponents wanted to stop any consideration of environmental and social issues in investments, they should have started a long time ago….”  This is a factual statement, we guess, but a weird one.  Yes, ESG opponents should have started a long time ago; we’ve said as much on countless occasions.  What’s weird, though, is the implication that “ESG opponents wanted to stop any consideration of environmental or social issues in investments,” which is flatly untrue.

What we’re talking about here are ERISA-governed retirement plans, not “investments” in general.  Or to put it more bluntly, we’re talking about the middle class’s retirement savings, over which they have precious little control.  In this specific instance, we’re talking about using ESG factors that could reduce returns in retirement plans and not even telling the owners of the accounts that it’s being done.

And here’s the kicker: using ESG was always permissible in ERISA funds.  It just had to be done conscientiously.  Seriously.  Under the Trump/Scalia Labor Department rule (which the Biden DoL suspended immediately), it was simply the case that fund managers who used ESG had to be able to demonstrate that they had a pecuniary reason for doing so.

ESG defenders are always going on about how it’s just good risk management and it’s all part of the process of finding the best companies that offer the best long-term values in light of long-term environmental and reputational risks.  If this were truly the case, then they’d be able to demonstrate or, at least, articulate the pecuniary benefit of using ESG factors in ERISA plans.  But they can’t.  Or at least, they won’t.  And now, thanks to the new Biden administration rule, they don’t have to.  It really is as simple as that.

Finally, we come to the top of Tobin’s statement, where he lies, blatantly.  “The notion of socially responsible investing, or ESG investing, got started many decades ago…”  The lovely and talented Mrs. Soukup owns and rides horses, so we feel a little guilty about beating this dead one, but then, Tobin as much as asked us to.

Socially responsible investing (SRI) and ESG are NOT the same thing.  In brief, socially responsible investing is bottom-up and voluntary, while ESG is top-down and coercive.  One favors divestment and avoidance of “problematic” industries and companies, while the other favors “engagement,” which, in practice, means coercion using gobs and gobs of other people’s money.

Less briefly, The Dictatorship of Woke Capital contains an entire chapter on the differences between SRI and ESG, Chapter 6, fittingly enough titled “From SRI to ESG.”  Moreover, as noted in that chapter, we were there at the creation (more than a quarter century ago), having been part of the solitary Washington research office that also housed an SRI shop – the Social Investment Research Service.

Also in the early 1990s, Suzanne Harvey, a smart and ambitious staffer in the Washington research office of Prudential Securities, partnered with her boss, Mark Melcher, the famously conservative managing direc­tor of the office, to pitch a new social investment tool to the compa­ny’s top brass. With their approval, she would create a research project within the Washington research team, dedicated to social investing. Management consented reluctantly, and Ms. Harvey soon launched the Social Investment Research Service (SIRS), which produced reports and screens on a whole host of social, political, and environmental issues. Users of the new service included both liberals and conservatives. Issues of concern ranged from the environment, women’s issues, labor rela­tions, abortion, the treatment of laboratory animals, and pornography to compliance with the Arab boycott of Israel. While SIRS mostly used the time-tested social screening methodology, avoiding the shareholder activ­ism of the South Africa divestment campaign, the Service nevertheless represented a significant development in socially responsible investing. It was the first analyst team in a major institutional research department dedicated specifically to social investments.

In other words, Professor Tobin, we know the history of this stuff better than just about anyone – and certainly better than you.  And we know that when you and countless others conflate SRI and ESG you do so purposefully, with the intention of deceiving the public and muddying the debate on shareholder activism and coercion.

In our day-to-day lives, we have yet to meet any, but we suppose there are people out there who truly and honestly believe in the ESG mission and who wish to practice its affiliated principles honestly and fairly.  Our advice to them would be this: before you do anything else, you have to end the dishonesty and deception.  Be honest about what ESG is, what it isn’t, what it can do, what it can’t, and what its very serious actual and potential drawbacks are.  Then convince everyone else in the ESG business to do the same.  And Since Tobin brought up the religious history of social investing, we’ll just close today with this, which emphasizes our advice:

“Everyone who listens to these words of mine and acts on them will be like a wise man who built his house on rock.

The rain fell, the floods came, and the winds blew and buffeted the house. But it did not collapse; it had been set solidly on rock.

And everyone who listens to these words of mine but does not act on them will be like a fool who built his house on sand.

The rain fell, the floods came, and the winds blew and buffeted the house. And it collapsed and was completely ruined.”

Stephen Soukup
Stephen Soukup
[email protected]

Steve Soukup is the Vice President and Publisher of The Political Forum, an “independent research provider” that delivers research and consulting services to the institutional investment community, with an emphasis on economic, social, political, and geopolitical events that are likely to have an impact on the financial markets in the United States and abroad.