The Environmental, Social, and Governance (ESG) movement has gained traction in recent years as a response to stakeholder capitalism. The first mention of ESG came in a 2004 United Nations report called “Who Cares Wins.”
The “E” prong emphasizes clean energy investments to radically decarbonize our economy towards net-zero emissions. The “S” prong promotes a strong adherence to socially conscious investing that’s often tied closely to diversity, equity, and inclusion (DEI) efforts. And the “G” prong relates to an individual company’s integrity and workplace performance.
But, as ESG gained steam, opposition has successfully challenged the movement and related practices for prioritizing non-financial factors and progressive social values.
Everyone loves the party game/icebreaker “two truths and a lie.” Can you identify what isn’t true about ESG?
A. ESG investing delivers poor return on investment (ROI).
B. ESG is market-oriented.
C. ESG policies are fueling inflation.
A. Truth! Since ESG investing prioritizes non-financial criteria over maximizing shareholder value, its related funds have generally performed poorly in the markets.
Harvard Business Review admitted that ESG investing results in low, diminishing returns for investors. It observed that “ESG is redundant” to efforts in the corporate world and “companies publicly embrace ESG as a cover for poor business.”
The publication also cited a joint study from Columbia University and the London School of Economics that found “ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees.”
Barrons described ESG investing: “As it is currently conceived, ESG is at risk of becoming little more than a marketing slogan, destined to confuse, or be labeled ‘greenwashing.’ ”That’s why even its most avowed proponents have declared ESG dead and called for a rebrand with names like “transition investing.”
B. Lie! While ESG investing has largely been championed by Wall Street, the Biden administration has supercharged the practice through a whole-of-government approach. A lawsuit recently found government pressure is behind ESG pushes.
ESG now informs presidential budgets, including that of the Fiscal Year 2024, and was legitimized under recent Department of Labor rulemaking. ESG posturing has recently surfaced in proposed agency rules relating to permitting reform, wildlife refuge management, and Securities and Exchange Commission (SEC) climate reporting.
C. Truth! ESG posturing is influencing many of the Biden administration’s energy and climate policies—largely with the push to achieve net-zero emissions by 2050. Therefore, environmental inflation (en-flation) is primarily fueling higher costs for gas, food, and energy.
The Biden administration’s net-zero policies—an extension of ESG—have increased energy prices a whopping 42% since January 2021. The Bureau of Labor Statistics (BLS) reports home heating oil is up 42.3%, gasoline prices increased 55.5%, and electricity spiked 28.5% between January 2021 and April 2024.
Bottom Line: With ESG on the downward swing, corporations appear to be reverting back to their original mission of creating value in business.
Recently, Exxon Mobil shareholders signaled their opposition to net-zero directives, and Shell Company is recommitting to “value over volume” by shedding offshore wind jobs and re-upping oil and gas ones. Even ESG flip-flopper and BlackRock CEO Larry Fink wants reliable energy sources to power data centers.
To learn more about ESG, go here.