The brave new world of ESG

by Ian Macleod

ESG is the hottest buzz term in corporate life. Many people love it. It certainly sounds alluring to ‘do well by doing good for people and the planet’ as its proponents advertise, but the road to hell is paved with things that sound enticing at first glance. 

Much like its predecessors and cousins - including CSR (corporate social responsibility), SRI (socially responsible investing) and impact investing - ESG (environment, social, governance) has a surface meaning that sounds sensible enough. Basically, businesses and other institutions ought to be fair to the environment and people, and should follow strict corporate governance rules.

If that was the totality of it, I could end this piece here and move on. But that definition is so shallow, it is deeply misleading. ESG is a global movement that says wonderful things, while deploying coercive methods to stifle business, distort markets and deny individual liberties. 

The basics

The “E” demands far more than following laws and not wrecking the environment. Members of the club swear allegiance to an austere version of “climate justice”. This is the sacrosanct position that man-made carbon emissions are the driving force of an imminent and catastrophic climate disaster, and they must be eliminated, with hardly a passing thought for the cost this will have. It is frowned upon to mention the phenomenal benefits of hydrocarbons in these circles.  

The “S” represents a rejection of the time-honoured principle that the people who have risked their own capital in a business are the ones who should benefit from the profits their investment produces – if profits emerge, that is. It insists that management teams work not just for shareholders, but for ‘stakeholders’. That is, it gives groups like employees and communities power far in excess of the investment, if any, they have made in the business. Their influence and rights are often at the expense of the shareholders, who retain their risks and obligations. 

As for the “G”, few would oppose sensible corporate governance measures and efficient reporting rules if a company is big and wants to raise money from shareholders. But in the ESG guise, governance can amount to arduous, state-imposed measurement of things that don’t relate to business performance. At its most extreme, it can be ruinous. Calculating, compiling and verifying data is costly. Elements of the ESG movement are pressuring for more and more disclosure on everything from race and gender of staff to every cubic centimetre of carbon dioxide expelled from a factory or of methane from a cow. 

Big business

ESG has rapidly scaled to eye-watering proportions. S&P Global tells us that in 2022 “ESG-focused money managers said they applied climate change policies across $3.4 trillion in assets and fossil fuel divestment across $1.2 trillion in assets”. That means they invested (and divested) other people’s pensions not only based on fundamentals, but to achieve ESG goals as well.

PwC forecasts “ESG-focused institutional investment soaring 84% to $33.9 trillion by 2026, making up 21.5% of assets under management”. And, according to McKinsey, “More than 90 percent of S&P 500 companies now publish ESG reports in some form.” 

Some people are getting very rich out of this. Some have fallen for the bad science. Many just go along with whatever shiny object has the eye of CEOs, politicians and development finance companies. 

SDGs

In ESG circles, the SDGs, Sustainable Development Goals, take on near-Biblical importance. These UN-produced targets are handed down from above and fawned over by the donor class and ESG Officers the world over. The “17 Commandments” tend to form the foundation of any sustainability plan.

The goals include the unrealistic “no poverty” and “zero hunger”; the vague “quality education” and the indeterminate “climate action” and “life on land”. 

Strictly speaking, the SDGs are voluntary. Many of the SDGs have found their way into legislation, but the SDGs as such are enforced by something far more potent than domestic laws: social pressure. With fervour, the SDGs are evangelised in corporates and academies alike. Shirt pins, email footers and endless jargon signal one’s membership of the group. Asking questions – say, “What does all of this cost?” – can draw looks of contempt. 

Predictable results

ESG has an unsurprising tendency to backfire. Shutting coal-fired power plants can force very poor people to burn wood and dung to cook food and heat homes – with deadly consequences. Corporate DIE (diversity, inclusion and equity) consultants habitually sow more discontent than they resolve. Manipulating financial incentives has spawned a whole industry dedicated to “greenwashing” (lying about environmental credentials). 

The poster child for ESG’s ability to ruin economies and businesses is Sri Lanka. This cautionary tale followed sustainability enthusiasts banning the use of chemical fertilisers, a policy that apparently came to former President Rajapaksa in a dream, together with do-gooder global organisations pushing “green” and highly unreliable energy production. The upshot of this was one of the world’s highest ESG scores. However, it also contributed to failed crops, failed energy and widespread impoverishment in a country where 15 million people of the total population of 22 million are directly or indirectly dependent on farming.

As Michael Shellenberger puts it, “Over 90% of Sri Lanka’s farmers had used chemical fertilisers before they were banned. After they were banned, an astonishing 85% experienced crop losses. Rice production fell 20% and prices skyrocketed 50% in just six months. Sri Lanka had to import $450 million worth of rice despite having been self-sufficient just months earlier.”  Of course, ESG’s Marxian routes are betrayed by an all-too-common excuse for the Sri Lanka failure: it wasn’t proper ESG. 

A better way

ESG is all the more wasteful given that we have so much evidence of a better way to achieve prosperity. Recent decades of staggering progress – the decimation of poverty, illiteracy, and deaths from natural disasters – did not come about because well-paid representatives sketched up a plan and allocated billions of dollars. 

Rather, people just got up every day and made decisions to better their lives in the context of some basic laws, rules and norms. They puzzled over what product they could make and sell. Then they experimented. Often they failed and had to retry. Entrepreneurs found better ways to deliver education. Engineers made the internet steadily faster and cheaper. Nobody told anyone to do any of these things. 

Todd G. Buchholz elegantly captures what I’m talking about: 

“Market competition leads a self-interested person to wake up in the morning, look outside at the earth, and produce from its raw materials, not what he wants, but what others want. Not in the quantities he prefers, but in the quantities his neighbours prefer. Not at the price he dreams of charging, but at a price reflecting how much his neighbours value what he has done.”

Utopian

My dismissal of ESG and the SDGs should not be taken as criticism of the intended outcomes. A healthy environment and excellent treatment of people are wonderful things. Corporate governance is entirely necessary. And who would oppose, say, SDG 16, “peace, justice and strong institutions”?  

My opposition is to the nature of the movement and the unrealistic belief that these things can be conjured up at a supranational level and then handed down for successful implementation – all without exacting a severe cost. I oppose the utopianism and the notion that central control is anything but a recipe for failure. 

ESG has a problem with reality. Committees discussing “responsible consumption and production” can achieve neither. The best they can do is set diktats that limit people’s freedom of choice, distort pricing mechanisms, and achieve a little bit of their goals. Too frequently they waste tremendous time and money, vastly misallocate resources (“malinvestment”, to quote Ludwig von Mises), and end up with little more for their efforts than a smiley photo in a vegetable patch surrounded by a humanitarian disaster of their own making.

Ian Macleod studied business and journalism, and completed an MBA in 2017. His journalistic focus on sports feature stories shifted to social and scientific commentary when lockdowns began in 2020. Ian also consults on entrepreneurial storytelling and runs ultra marathons.