A Short Guide to ESG: Conclusions

A Short Guide to ESG: Conclusions

As I conclude this series depicting the ESG landscape, let me clarify a few of my conclusions. I’ve tried to keep my sketch fairly dispassionate when writing about ESG Terms, History, Advocates, Goals, Finance, and Legislation. My last three columns exploring the economic, political [link], and philosophical [link] problems created by ESG policies have included more editorializing and argumentation.  

Few things are completely devoid of worth or insight. ESG is no exception. I hope readers do not find in my work reactionary or a total rejection of every facet of Environmental, Social, and Governance criteria in business. I’ve noted multiple times that certain elements of ESG have great legitimacy. Companies should assess environmental risks to their businesses, even including political dynamics of environmental risk (such as banning internal combustion engine vehicles or requiring greater disclosure). However, assessing and adapting to a world with environmental risks in no way requires companies to engage in climate activism or to sacrifice efficiency for the sake of polishing their “green” bona fides. Nor does it mean governments should actively police and regulate questionable environmental goals.

Many Social criteria are unobjectionable. Of course employers should value and respect their employees. Of course they should hire employees who will bring the most value to the firm regardless of personal characteristics or identity that are irrelevant to their contribution. Of course companies should foster cultures of openness and feedback. All these things are good business practices that can be difficult to implement. Yet the advocates of appropriate “Social” criteria go much further than this. 

They expect companies to be anti-racist or LGBTQ allies. Companies are evaluated on their “diversity” programs – how many boxes do they check of some activist group’s wish list. We’ve moved well beyond the realm of business here into social and political advocacy – and, again, those who do not share the Progressive ideals of ESG advocates are upset with illegitimate co-opting of other people’s resources to advance narrow goals.

The same pattern holds for Governance. Having diverse perspectives on a board can prevent myopia and mistakes. Yet how does diverse perspectives translate into “diverse” people? Certainly, someone who differs in their gender or skin color might have a different perspective. But they might not…

And people sharing an ethnic or cultural background may have very different perspectives. And a different perspective need not always be valuable – a six-year old may have a different way of seeing the world, but that doesn’t mean they should be a board member of a fortune 500 company!

So, I do not deny that there are merits to ESG, nor that there are serious problems elements of ESG seek to address. But to move forward, we must find common ground and respect for people and property. And we need to have frank conversations about strategy. 

Companies should not have “Chief Diversity Officers.” But they should have executive roles that are concerned about creating a workplace culture where employees are respected and rewarded according to their contributions. Managers should not be allowed to exercise arbitrary preferences or discrimination against more qualified candidates.  Executives responsible for creating this culture should also look for flaws in their marketing, interview process, or hiring programs that wrongly weed out certain subsets of candidates when some of those candidates could bring more value to the firm. Companies should also not have “Chief Sustainability Officers.” Instead, they should have executives who care about improving efficiency and who care about the spirit of environmental compliance.

Such approaches prioritize value creation and merit. They recognize that processes can be flawed in ways that have disproportionate impacts on different groups of workers. But the north star remains clear. Companies should not be evaluated on a racial or gender quota. As Martin Luther King Jr. said, we should aspire to live in a world where people “will not be judged by the color of their skin, but by the content of their character.”

Similarly, it is important to ask questions about direct waste created by one’s business – gases, discharge, etc. – and how to handle that waste in ways that do not harm others. But much of what goes for “sustainability” today is simply misguided. 

For example, companies should not be overly concerned about how much of a product ends up in a landfill. Garbage costs money to collect and store. Those costs are what matters, not how much material is added to a landfill. Similarly, if fewer materials can be used to reach the same goal, companies should take that approach as a matter of fiscal prudence.

What aggravates so many people about ESG is not necessarily any single policy, idea, or goal, but the often-underhanded way in which the movement operates to obtain its goals. Rather than working through open democratic processes and shareholder proxies, a small subset of the world population has taken it upon themselves to make decisions for the rest of mankind without their knowledge or consent. 

Executives in large corporations, insulated EU officials, self-appointed climate activists, and a global elite across a variety of international organizations drive ESG adoption around the world. And they primarily do so by targeting or pressuring individuals who manage huge amounts of capital (pension fund managers and the Blackrocks and Statestreets of the world) or wield tremendous political power (regulators, policymakers, etc.). They want to transform the economies and societies of the world into their ideal. People who do not share that ideal are understandably angry about how they have attempted to do this by co-opting political and economic institutions.

ESG advocates have a perverse way of using markets to achieve their goals. They want to co-opt resources by persuading a few key people to sign on to their agenda. And they use high pressure tactics to shame companies into adopting their goals. These are not market mechanics. Nor do they use markets for their most important function: discovering the most efficient ways of doing things subject to existing constraints.

We ought to focus on better pricing and better competition in areas of concern from managing forests, water, and waste to the most efficient ways of reducing greenhouse gas emissions. Unfortunately, ESG experts and government officials are convinced that they already know the answers to these questions and simply need to redirect massive resources accordingly. But if they are wrong, we will all suffer – especially the poor in developing countries.

Besides finding common ground, it is hard to say how else we should approach ESG advocates. Some may be open to persuasion about the likely ineffectiveness of their approaches to policy. Others may be amenable to the idea that people should be consulted before their resources are used to achieve various ESG goals. But most ESG advocates will simply have to be pressured or resisted. And many more will simply follow the money.

The more money we can keep in competitive free markets built on mutually beneficial exchange and serving consumers, the better off people in society will be.