The end of ESG and corporate wokeism is not far away

It seems clear that the era of ESG and corporate wokeism is closing.

A turning point, perhaps, was around a year ago when the Netflix CEO sent a memo around internally at a time when many employees were getting tearful over some content Netflix was streaming that made them feel uncomfortable (read: it departed from what was then a tsunami of woke productions enough to make most of us vomit.) The CEO’s memo said in part that employees who struggled to cope with breadth of content are perhaps not suited for employment at Netflix. I enjoyed reading about that memo.

The CEO of Unilever is to step down in a few months. He is 5 years in the role and Unilever’s return to shareholders during his time has been below the market average and very much below consumer products companies, ie Unilever’s competition. For the 5 years in charge, the soon to be ex CEO spent quite some time and attention on publicly asserting the need for Unilever to support a higher purpose (by that he means he wanted to use other peoples’ money, shareholders, to promote the causes he thought the shareholders ought to.) In 2020, he said “we need a new type of capitalism” and went on to insist on mandatory ESG reporting to enforce it. He will be gone, soon. I guess the shareholders didn’t agree with him. Another win.

The Wall Street Journal reported this week that Vanguard “bucks the ESG Orthodoxy” by pulling out of the Net Zero Managers initiative. The CEO Tim Buckley said “our research indicates that ESG investing does not have any advantage over broad based investing.” He went on to note that Vanguard cannot meet its fiduciary duties to clients at the same time as imposing ESG constraints on their assets. This is a very big win.

Meanwhile in Australia, the market regulator ASIC is reportedly suing giant wealth manager Mercer for alleged greenwashing. The allegation is that Mercer spruiked the green credentials of one of its investment options, called the Sustainable Plus option, claiming that it did not invest in coal, oil, gas, alcohol or gambling companies, while in fact – wait for it – investing in some of the biggest and best performing companies operating in those sectors. If these allegations by ASIC are correct, then that could be interpreted as Mercer confirming that its fiduciary obligations cannot be met at the same time as excluding certain well performing assets. I think we know a few compliance people in the investment funds business will be working long hours and weekends right now to see if they too have been greenwashing, deliberately or accidentally. The thought of compliance people working over the weekend is such fun. I know, it’s uncharitable to think so, but Compliance worrying that they haven’t complied is another win.

ESG and wokeness go hand in hand in corporate life. The proponents assume that they are on the right side of history and they justify taking other peoples’ money to further what are political causes. I have no objection to any employee who spends the weekend on their own time and dime promoting such causes through the normal political channels. I have no objection to any group of shareholders coming to the conclusion that they want their company to have a higher purpose and instruct the board of directors to devise the appropriate strategy.

It seems to me that there are very few, if any, shareholders who want to use their businesses for political means other than some non-publicly listed private organizations, which don’t concern us in this piece. It is the publicly listed entities that have shareholders who are at risk.

So why then did ESG and corporate wokism emerge over the last 20 years? I believe it started with political noise from people like Al Gore and others, racist groups, treasonous groups, activists of many sorts all grandstanding about pet topics. Given enough time, momentum, rent a crowd activists to stand outside a corporate head office chanting inanities, most business management would look out over the street with a nervous eye. Business prefers not to get involved. And yet they did get involved. Why?

There are three discernible characteristics at play among business leaders that explain it all.

One, the genuine clots who believe the latest doomsayers, who believe the fabricated claims of the politically unhappy; they insist on action and working their plans into the corporation. Easy to do: they just had to copy the approach that they thought everyone else was following, ie the playbook written by the activist groups outside the corporate world sent in to feed on the fears of some inside. These are the people who feel that they are morally superior and insist on controlling others to impose their own views. A ghastly bunch, most commonly found voting Democrat in the US, Lib Dem in the UK, Teal in Australia and all of them advocates of public broadcasting. They read the New York Times, The Guardian and The Age/Sydney Morning Herald.

Two, the opportunists who saw an opening to make money, create a fund, call it Sustainable, preach its green qualities, its woke qualities and watch the suckers roll up with their money.

Three, perhaps the majority, those who just want a quiet life. They talk like this: I don’t need the hassle or the distraction when I’m trying to run a business; I’m ok if we say we support sustainable development as long as we don’t have to change how we do business but it keeps the activist crowd away from our corporate offices.

Fighting a losing battle against these three groups was the small set, in which I include myself, only to be called racist, phobic, dinosaurs, immoral, biased although unconscious of my bias etc.

How to respond?

I remember over 20 years ago first hearing the claim that ESG was actually good for investing, the returns would be better. Well this was logically impossible. No portfolio can enjoy improve returns by excluding the possibility of investing in certain assets: if those assets would fare badly, the good portfolio manager would avoid them in any event. If they fared well, then an exclusion would prevent the portfolio from the relative gain.

It now turns out that practical research supports my view. Vanguard’s CEO mentioned above said it. The Harvard Business review in March 2022 reported studies from researchers at University of Chicago that found companies rated by Morningstar as having high ESG scores performing worse than the companies that were rated lowly for ESG. Research from Columbia University and the London School of Economics, also reported by the HBR, showed that labour and environmental compliance records of highly rated ESG companies worse than their lowly rated counterparts. Well, well; call me surprised.

That Vanguard has come out in the last week to effectively demonstrate far better than I can that ESG was wrong, wrong from the beginning, and always will be wrong, makes me unusually chirpy.

The best way that a business can help society as a whole is to make a profit. That is all it needs to do. When a business makes a profit, it has successfully taken resources, raw materials, labour and using know-how produced something greater in value than the value of the inputs. It has been efficient. It has used less to produce more. On the other hand, a business making a loss is inefficient, using more to produce less. Profits are the signposts of efficiency.

This childish portrayal of ESG is typical.

ESG scammers, crooks, greenwashers and all the rest need to be expunged from the mix and I think the revolt, underway for some time, is now well and truly out in the open.

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