05 Oct Is ESG a ‘Scam’?
The following commentary/forecast is one I wrote in my capacity as a senior fellow at “the nation’s oldest consumer protection agency,” Consumers Research, where, among other things, I compile a weekly letter for public pension-fund managers. I am sharing it here today because I thought it might be useful to some of you.
If It Walks Like a Duck…
In May of 2022, after S&P removed Tesla from its ESG index, Elon Musk – then the richest man in the world – called ESG a “scam,” and insisted that it had been “weaponized by phony social justice warriors.” Since then, the word “scam” has been appended to ESG hundreds of thousands of times, with environmental activists and ESG opponents alike insisting that the pairing is inarguably appropriate. ESG is not a well-meaning investment strategy gone awry, they insist. It’s not even a misguided, heavy-handed, politically influenced approach to investing that has done more damage than good and should, therefore, be abandoned. It is a swindle and nothing more, the means by which the richest players in capital markets are making themselves richer by manipulating the hopes and fears of naïve Western progressives.
A big part of the reason that this perception of ESG has taken hold and become firmly entrenched is that which can be called “the duck test” – i.e. if it walks like a duck and quacks like a duck, then it must be a duck.
Consider, for example, the issue that riled up Elon Musk. At about the exact moment that he was becoming more politically outspoken and more politically controversial, S&P dropped his company – the OG developer of post-internal-combustion-engine automobiles – from its ESG index. And it did so in response to technical, reporting disagreements that had nothing at all to do with Tesla’s environmental worthiness.
Although it would be hard to prove that this was anything but a bureaucratic snafu and even harder to prove that it was part of a scam, both the circumstances surrounding the move and S&P’s rather pathetic rationale for it created the widespread impression that something untoward and “scammy” was afoot. In other words, at the very least, it walked like a duck.
This is just the tip of the proverbial iceberg, however, and some of the biggest players in ESG-world have been even considerably more duck-like in their behavior. I took a look at one such player – Institutional Shareholder Services (ISS), the undisputed heavyweight champion of proxy services – in my book, The Dictatorship of Woke Capital:
Two companies—Institutional Shareholder Services (ISS) and Glass Lewis—dominate this space, accounting for 97 percent of the proxy advisory business.
ISS, by far the larger of the two services, is notoriously pro-activist in its proxy recommendations….
ISS’s definition of “good governance” almost always entails recommending in favor of shareholder proposals that hew to a very narrow definition of “good,” one that promotes progressive political activism….
The conflict of interest for ISS is significant, lucrative, and damning. Traditional institutional research departments, usually run by large brokerage houses, provide research on companies to asset managers and others. They evaluate the company on a variety of measures and then recommend that their clients “buy,” “sell,” or “hold” these companies’ shares. When Thompson/ISS bought the SIRS in 2001, it made a new variety of institutional research available to a much larger audience—one that continues to grow. From that point on, ISS has had the ability to issue buy, sell, or hold recommendations to institutional investors based on the socially responsible nature of the businesses it evaluates. In and of itself, this would not be a significant issue, but as part of ISS’s broader business plan and political agenda, it has created an enormous problem—but one that is nevertheless lucrative for the company.
Today, ISS is the fourth largest third-party ESG ratings service provider in the world. That means it develops its own screens and measures; it sells those screens to institutional clients, helping them “discern” what is or is not proper behavior for a company and what is or is not a proper investment strategy for clients. Then it offers itself as a proxy advisor to those same clients, making recommendations on how to vote on shareholder proposals and performing the proxy votes on their behalf. In other words, ISS is shaping the perceptions of what investors’ interests should be and which companies they should invest in, before telling those same investors how to vote those interests. This is institutionalized, corporate “begging the question.” ISS is essentially fixing the game by creating shareholders who will, almost by definition, vote the way it wants them to on proposals ISS has decided matter. In this way, utilizing the successor operation to the SIRS, ISS can “create” the votes necessary to compel company management to comply with its wishes. This is coercive, conflicted, and most notably, intended to advance ISS’s interests rather than those of the investors.
But it gets worse.
ISS also has a division called ISS Corporate Solutions, which acts as a consultant to corporate clients on how to improve such things as governance, environmental record, pay disputes, etc. The proper term for this type of operation is “protection racket.” You buy our protection and we’ll make sure your windows don’t get broken. You buy our corporate solutions, and we’ll make sure that the asset managers we tell to buy your company are also aware that they should vote against any ESG proposals against your management. ISS has all bases and all aspects of the business covered.
Michael Bloomberg, one of the richest men in the world and one of the most powerful men in finance has a similar setup, one in which he, personally and politically, will be the primary beneficiary of increased utilization of ESG principles and associated mandatory regulatory schemes. Two years ago, in their comment to the SEC on its proposed emissions reporting rule, Boyden Gray & Associates described Bloomberg’s cut of the action:
[T]he proposed rule acknowledges it is based on the work of the self-anointed Task Force on Climate-related Financial Disclosures (“TCFD”) Disclosure Framework. The proposal states, incorrectly, that the TCFD is “an industry-led task force”. In reality, since its creation in 2015, the TCFD has been a government-sanctioned activist organization, under the leadership of partisan climate activists, Michael Bloomberg and Mark Carney, both of whom have significant conflicts of interest…. The work of the TCFD is referenced 243 times in the SEC proposal….
It bears repeating that the TCFD was created by, funded by, and remains directed by Michael Bloomberg, who currently serves as “UN Special Envoy for Climate Ambition and Global Ambassador for the UN’s Race to Zero Campaign.” Bloomberg himself rallied to create the GFANZ, a group of 450 financial institutions that claim to manage over $130 trillion in assets. Uncoincidentally, Bloomberg’s company has announced it intends to be the “the financial industry’s first port of call for ESG information.”…Earlier this year it launched climate transition scores starting with the oil and gas industry that benchmarks companies’ progress towards net-zero against their own published targets. The data was expanded recently to include the metals and mining sectors. The climate transition scores are provided with insights from Bloomberg NEF, the company’s new energy financing research business and its Bloomberg Intelligence analysis unit. The scores have benefited from a year-long goal to improve transparency into the emissions records of global companies.
In short, the one individual that essentially funded the creation of the SEC proposal also happens to be the single-biggest donor to the party that directs the SEC, and also happens to be the same individual who owns the proprietary tools that are the preferred means for the financial sector to obtain data and would also be the preferred tool to comply with the SEC proposal, likely generating billions in new revenue for Bloomberg.
It is, by now, common knowledge that ESG funds typically charge 40% higher management fees than non-ESG funds – often for plain vanilla market-mirroring funds or for funds that are nearly identical to much cheaper tech funds. Tariq Fancy, the former director of sustainable investing for BlackRock, the king of asset managers and the king of ESG funds, has written extensively about how ESG – and ESG at BlackRock, in particular – is driven in large part by the desire to build business that is more expensive to customers and, therefore, more lucrative to the management firms.
Finally, now, enter KPMG, which recently warned that 75% of companies worldwide are not ready for the transition to new ESG reporting rules:
Three-quarters of companies globally are not ready to have their environmental, social and governance (ESG) data audited externally months before new regulations kick in, according to a new report from KPMG published on Tuesday….
Regulators say external auditing of sustainability-related data – while not as extensive as financial auditing – is crucial for giving investors information free of misleading environmental claims, known as greenwashing.
The EU rules will require disclosures be audited while countries adopting the International Sustainability Standards Board’s reporting requirements can also demand external checking.
Yet of 750 companies surveyed by KPMG, only 25% feel they are sufficiently prepared.
Heavens! Whatever will these companies do? How will they find ways to make themselves compliant? Never fear! A hero has emerged with an answer to these questions and more!
KPMG has launched the KPMG ESG Academy in collaboration with Microsoft and some of the world’s leading universities and institutions. The scalable, turnkey academy leverages the KPMG Learning Enablement and Analytics Platform – a preconfigured platform enabled by Microsoft 365, Azure, Teams and Microsoft Viva Learning that helps to deliver learning directly in the flow of work. It can be offered as a standalone virtual learning tool or can be integrated into clients’ in-house learning platforms, helping organizations support their ESG initiatives by delivering foundational and advanced learning on a wide range of ESG topics and disciplines.
The Academy course material is structured around the latest business thought leadership in environmental, social and governance (ESG) topics, with content developed by globally recognized ESG specialists from leading universities and institutions, in collaboration with KPMG subject matter professionals in sustainability.
The course content is fully customizable and scalable.
Praise Gaia! The company that identified the problem – and that is part of an industry that has bet its entire future on ESG – coincidentally also just launched a new product that will alleviate the problem! What a fortuitous coincidence!
So… was Elon Musk right? Is ESG little more than a scam?
It would be difficult to say definitively that it is, in all instances and at all times. There are well-meaning and honest people throughout the ESG industry. Their problem is that the biggest players in that industry drown the rest of the players out – what with the volume and intensity of their quacking.