The following is a direct excerpt from Marty’s Bent Issue # 1077: “No more unsolicited thoughts on ESG.” Subscribe to the newsletter here.
I know, I know, I know. Some of you may think that Crazy Uncle Marty’s anti-ESG schtick is getting a little smelly. However, as you should have realized by now, I can’t control myself. When I think there is a good point to make on the subject, I will. And that’s what I’m here to do today.
The above excerpt comes from a blog posted yesterday by Aswath Damodaran, professor of finance at the NYU Stern School of Business, which draws on an article he published last September who began to unravel the ESG movement in the capital allocation space and beyond to determine whether or not it is a productive framework for conducting business and life. I highly recommend that you take the time to read both articles because Aswath does an amazing job of breaking down the thesis behind the investment strategy, how it is implemented in the real world, its failure to meet its stated goals, why it can never accomplish its stated goals and a better framework from which to approach “doing good”.
To summarize the central argument advanced by Aswath; ESG does not work because it ignores the existence of free will and reduces individuals and individual processes into uniform inputs into a rigid mathematical function that spits out an ESG score. Basically, this type of scoring system cannot work because, again, it ignores the existence of free will and the subjectivity of “goodness” in the eyes of two different individuals. It is literally impossible to settle on a scoring system that people can agree on. And since this is the case, any rating system put on the market will inherently carry the prejudices of those who build it; governments seeking to gain more power over their subjects; and corporations seeking to take advantage of the benefits offered by regulatory moats.
Moreover, when these investment strategies are applied, they do not produce a desirable return profile. This movement is therefore crowding out small players by increasing the cost of compliance and producing poor returns for investors. A lose-lose for most economic players.
Now, if that’s the case, why are so many people clamoring for it? Well, as Professor Damodaran so eloquently describes in his last article on the subject; because most individuals do not want to take personal responsibility and extreme ownership for their impact on the world. Many are so lazy that they would rather have the government, capital distributors and corporations make these decisions on their behalf and provide them with an “ESG certified” label that they can point their finger at and say, “See, I’m doing it. part! ”Completely ignore the fact that when these personal responsibilities are transferred to the bureaucrats, the bureaucrats will do what the bureaucrats do – be they political or corporate bureaucrats – manipulate the system in their favor while doing make everyone else’s situation worse.
Politicians will try to gain more control and some companies will try to take advantage of this to create an artificial divide around their companies in order to artificially reduce competition. Which leads to another interesting line of discussion under the global ESG topic; is it a form of fascism? I think you could argue that yes, yes it does. And nothing made that clearer to me than a clip floating on Twitter earlier this week of Dave Smith educating a fellow panelist on how Mussolini defined fascism.
“He defined it as a merger between the Corporation and the State.”
While Dave may have expressed this to explain how vaccination mandates can be seen as fascist, I think we can apply this to what’s going on throughout the ESG movement as well. Under the leadership of the UN (a co-ordinated group of countries – the state) and the “climate change targets” they have arbitrarily set for the world’s population, corporations and capital distributors are beginning to lead the way. production and picking winners and losers through an ESG scoring system built around these arbitrary and subjective worldviews. Favor certain forms of energy and board structures over others without being open to compromises that are being ignored. A good example of this is that wind and solar are favored as energy sources to be ‘green’ when tapping a huge amount of hydrocarbons and slave labor up front and down. back of their life cycle.
By creating arbitrary and rigid guidelines in which entrepreneurs must operate, the state and businesses best placed to benefit from these arbitrary guidelines dictate the means of production in a subversive manner. There is no obvious physical seizure of the means of production. Instead, the means of production are slowly but surely pushed in a certain direction until the desired degree of control is in the hands of the state and its cronies.
As a bitcoin miner, this problem became very clear to me. In a sane world, bitcoin mining would be seen as a massive boon to conservationism. For the first time in human history, we have a mechanism by which we can profitably monetize previously wasted and stranded energy assets. The grid’s natural incentives force miners to cut their electricity costs as low as possible and the best way to do that is to seek out wasted and stranded sources of energy that no one else is willing to use. Bitcoin miners will appear in the middle of nowhere to use energy that was LITERALLY ON FIRE without producing positive economic value. By definition, making the world more energy efficient.
Not only that, but the miners using this previously wasted energy do so to cost-effectively facilitate and secure the best monetary system humanity has ever come into contact with. A monetary system that will put an end to the misjudgment of opportunity costs induced by the ability to print money out of thin air. As Steve Barbour said during a conversation on the subject we were part of it at the beginning of the afternoon, it sanctions the misallocation of capital, which leads to less unnecessary consumption. When governments and central banks print money out of thin air to save companies that have misallocated their capital and resources to the point where they risk going out of business, they are perpetuating this misallocation of capital and resources. , which we can say is a negative on the environment and society in general.
I’m sorry for wandering, monsters. I just had to get those thoughts out of my chest after reading Aswath’s blog last night and participating in a conversation about the topic this afternoon. I leave you with the practical advice from the Aswath blog post, which in my opinion is a much better framework for individuals, businesses and investment professionals to approach the concept of “doing good in the world.” world”. It should be based on your personal values and not on a top down diktat defined by a very narrow set of values.