Jason SpiessWhen The Crude Life radio programs and podcasts began covering Environmental Social Governance ESG in 2015, it became quite clear the construction of this formula was designed to change how we collectively do business.
Since 2015, I’ve personally interviewed over 100 professionals about their organization’s ESG methodology, and several predictions or comments stand out more than others.
I’ve heard everything from ESG will save the planet and humanity to ESG is designed to take out capitalism and the free market.
Most of the people I’ve spoken to assume that investing in ESG programs are designed to highlight, showcase and reward companies that are helping the collective movement to “save the planet.”
Here’s the bottom line near the top in Paragraph Five – ESG ratings are based on “single materiality”, which is basically how your organizational choices impact of the changing world on a company P&L, not the reverse.
The term “single materiality” may be antiquated soon too. “Materiality” is simply an accounting principle which states that all items that are reasonably likely to impact investors’ decision-making must be recorded or reported in detail in a business’s financial statements using Generally Accepted Accounting Principles (GAAP) standards. Two major issues with this paragraph of fact by the way.
First the GAAP Standards are another set of rules put forth by appointed leaders without any accountibility. Second is that this past year more and more organizations are pushing for “double materiality”.
The concept of double materiality acknowledges that a company should report simultaneously on sustainability matters that are financially material in influencing business value and material to the market, the environment, and people.
For the past decade, asset management firms have been just fine letting the confusion take off like wildfire. The more confused the people are, the more potential business that will exist for those highly popular ESG funds that come with higher management fees.
The real danger with ESG investing is that it might actually convince electedand appointed policy makers that the government or marketplace can solve major societal challenges such as Climate Change. Truth is, there is no hard science on Climate Change, only models, hysteria and polarizing points.
According to Bloomberg, “[ESG] ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders.”
This is an example of “single materiality”. It separates profit and planet. The current ESG ratings system, which helps “educate and direct” an invididual’s ESG fund selections, are based on “single materiality”. Furthermore, ESG ratings still do not see borders, so doing business with Russia, North Korea and Iran is ESG fine, using coal to heat homes in negative zero temperatures is ESG not.
Another huge issue is ESG Doublespeak. ESG Doublespeak has confused the majority of individuals who promote ESG as well as many of the investors and portfolio managers.
This ESG confusion has become a handy marketing tool for some ESG products. For example, when BlackRock launched its U.S. Carbon Readiness Transition fund in April of 2021, the exchange-traded fund raised $1.25 billion in one day. That was a record for funds raised.
Other Confusion-Fueled investing led to promises of a “broad exposure to large and mid-capitalization U.S. companies tilting toward those that BlackRock believes are better positioned to benefit from the transition to a low carbon economy.”
Doesn’t that ESG Marketing sound official, safe and solid? Except there’s no mention of driving the transition and the fund holdings seem remarkably standard. Real ESG goes beyond surface gaslighting and talking points. In this BlackRock example, oil and gas companies Exxon, Chevron, and ConocoPhillips are among the fund’s top 100 holdings.
Check out this headline and opening paragraph from Reuter’s
Return of Coal A Threat to European Companies’ ESG Ratings
European companies turning to coal as an alternative to Russian gas face a hit to their environmental, social and governance ratings, leaving them scrambling to impress investors still vocal on sustainability.
So, what do we we learn? That ESG funds are based on unregulated ESG ratings.
And, ESG ratings are built on comparative rankings of appointed leader and industry peers who do not have to live by the rules they construct. There are no universal standards. Furthermore, the data underlying ESG ratings are mostly unaudited and often antiquated or incomplete.
As a result, many companies, leaders and shareholders have questions galore and increasing anxiety about the methodology. According to a recent study, more than 70% of executives surveyed across multiple industries and regions reported that they lack confidence in their own non-financial reporting.
Let me rephrase that. More than 70% of executives surveyed reported they do not understand or know how to report on ESG yet are being forced to with their company’s value on the hook as well as their personal financial situation.
This is literal predicament our government is supposed to protect us from, not endorse or create. If I were to use Webster’s Dictionary to literally describe what our government and bankers are currently doing, it’s nothing short of creating Selective Serfdom and continuing their practices of Rank Prejudice.
In the land of confusion, it’s time for a conclusion. There has been thousands of studies by academics and asset managers who have tried to demonstrate the relationship between high ESG companies and equity returns. According to the Harvard Business Review, more than two thirds of all the ESG studies show at least a non-negative correlation between ESG and financial returns. However, no study has proven that ESG causes higher returns and recent research has called into doubt the link between ESG and outperformance.
To repeat that last statement of fact from Harvard: no study has proven that ESG causes higher returns and recent research has called into doubt the link between ESG and outperformance.
Questions on today’s lesson? Know someone using Ethical Energy? ESG University wants to know who these leaders are as we continue to showcase and highlight ESG solutions in energy. Email us at [email protected] with names of companies, people and organizations showing ESG in action. The ESG University is also a reader-supported publication. To receive new posts and support Jason’s work, consider going here become a free or paid subscriber.