A commenter asked a few questions about ESG. I have expanded my reply a little here:
I first ran across ESG as a researcher in the investment department of a consulting actuary in the UK s0me 15 years ago. It sprang out of the compliance section of a ratings system whose main components were business, staff, process, risk, compliance, performance and other. The other section back then was expanded to include ESG.
Here's a couple of links.
https://www.techopedia.com/definition/environmental-social-and-governance-esg
The “Environmental” aspect looks at how the company affects nature. It checks things like how much it helps or harms the environment, how it uses resources, and its efforts to reduce pollution. This area is all about dealing with climate change and using energy wisely.
The “Social” section is about the company’s relationships with its workers, suppliers, customers, and the communities it operates in. Here, it’s about fair work conditions, respecting diversity, helping local communities, and standing up for human rights.
Lastly, “Governance” is about how well the company is managed. This includes how the company is run, how it pays its top executives, how it keeps honest records, and how it listens to and treats its shareholders.
“ESG stands for environmental, social and governance. These are called pillars in ESG frameworks and represent the 3 main topic areas that companies are expected to report in. The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company's day to day activities.”
Some aspects are objective - measurable and desirable - especially the environmental aspects around pollution.
There are already employment laws in place that make discrimination illegal, which makes the Social category entirely political. In the old investment research the "governance" aspect clashed with Business.
From the investment manager perspective, the objective of investment managers is to "achieve superior risk adjusted returns over the medium term after fees and costs" on behalf of clients – retail and wholesale.
The is sue is, as usual, overreach and dogma. There is no climate crisis and the entire narrative is easily debunked with just a cursory examination.
The climate crisis freaks have already cost businesses and consumers trillions of dollars – firstly in “transition” costs of building forests of windmills and plantations of solar panels that destroy the environment where they are installed and where the raw materials are mined, but also have embedded higher costs for the generation of electricity that businesses and consumers have to pay.
A lose, lose, lose scenario compared to hydrocarbons. Note the continued use of terms like “fossil fuels” (since when is natural gas a “fossil”) and “carbon footprint” – carbon exists in solid form, in diamonds and coal – what they should at least be saying is “carbon dioxide” – the gas that helps feed the world because it is essential for plant life.
The “environment” past of ESG reduces investment returns and increases investment risks and so, in my view, hurts the investor as well as reducing economic activity and societal well-being.
Beyond investment, the “E” component of ESG is just as important, if not more so in the banking, finance and insurance areas - loans and insurance can be blocked for subjective reasons, by chicken little and gutless insurance companies and banks.
Jim Jordan is on the case, from here:
BlackRock, State Street subpoenaed by U.S. House in ESG probe | Reuters
“Dec 15 (Reuters) - The U.S. House of Representatives Judiciary Committee said it had subpoenaed BlackRock (BLK.N) and State Street (STT.N) for documents and communications related to its probe into whether environmental, social and governance (ESG) efforts violate antitrust laws.
The committee wrote to BlackRock and State Street on July 6, requesting documents. But response from both the companies on the request has been inadequate, the committee said in a statement.”
Investment managers say they are cooperating fully, no doubt using the “Goldman Sachs” defence tactic from the Financial Crisis of 2007 to 2009 to provide tens of thousands of pages of documents!
On a side note, consider this.
BlackRock hits a record $10 trillion assets under management | Financial Markets News | Al Jazeera
BlackRock manages funds on behalf of governments, companies, pension funds and retail investors around the world. It does NOT own these funds, it has been granted the ability to manage these funds on behalf of others, who could actually manage the funds themselves directly.
Blackrock must compete with other investment managers and their clients to produce returns that match objectives mutually agree with the client.
BlackRock is a listed company with a market capitalization of around 120 billion bucks – which represents the estimated present value of future earnings – which are based on its retained profits and the value of buildings and equipment.
On other words, the value of investments BlackRock manages on behalf of others is 83 times more than its stock market worth.
The issue for BlackRock is how to compete with others. Maybe by damaging the capability of its competitors or maintaining an edge in all the markets (across all countries and investment sectors (cash, binds, equities, real estate, hedge funds and alternatives) and all the countries from which its investors come from. Imagine the conflict it will have between managing funds for an OPEC nation in global equities – and a climate freak US state that doesn’t want them! Tailored investment management agreements required AND the climate freak MUST tell those he represents whether the tailored management agreement has helped or hindered investment returns AFTER fees ad costs. (The more tailored the investment management agreement between BlackRock and a client, the higher the fees for that tailoring).
Here is an example of BlackRock’s expertise in the active management on an active basis (half of its 10 trillion is passively managed against an index – no discretion allowed – just match the index return).
Global Allocation Fund | MDLOX | Investor A (blackrock.com)
Not very exciting! The fund has been going almost 30 years and is worth 17.5 billion bucks. The “raw” comparison is the top line against the bottom line. Down 5.4% in the last 12 months and down 1.1% PER YEAR for ten years.
Chances are it won’t feature as a “Buy” with many investment consultants, leaving the door wide open for other investment managers!
Onwards!
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The ESG concept rests on some insights that are valid, assuming they are done right.
Where it goes wrong if arbitrary proxies are used in the categories that make it political not factual, and therefore serve political agendas, to which the anti-trust concept may indeed be applicable.
E for environmental is very difficult to define in a reasonable way, even if it might be desirable, but CO2 is a bad proxy for what the real problem is, which is simply pollution. CO2 is plant food, not pollution.
S for social, is equally important - we should want companies that are responsible citizens that contribute to the community, but again this cannot go by political proxies for the real thing.
Governance, there has been a lot of research into management structures that produce better, faster, leaner and more efficient companies. But again, instead of honest research into a notoriously difficult to prove concept, arbitrary and highly politicized proxies are being used that amount to conformity to a norm, which is probably a direct enemy of performance.
In short, the whole thing is excrable.