The week of Monday, October 23: The ESG debate, antitrust, inflation, electric vehicles, and much, much more.
The week of Monday, October 23: The ESG debate, antitrust, inflation, electric vehicles, and much, much more.
It was an unexpected pleasure to turn to the Financial Times this week to find that it was running an article entitled “ESG is beyond redemption: may it RIP.” Looks promising, I thought, and good for the FT, so often ESG’s Pravda, for running it. When I saw that Aswath Damodaran had written the piece, my hopes rose still further.
Damodaran is professor of finance at the Stern School of Business at New York University. He is a specialist in stock valuation, so his deep skepticism about the contribution made by ESG (an investment “discipline” in which companies are partly assessed by how they score against somewhat murky environmental, social and governance — ESG — criteria) to a company’s value is worth noting.
That said, ESG does deliver considerable value to all the rent-seekers who extract so many fees from it, and to the ideologues who look to use ESG (and its equally repulsive symbiont, stakeholder capitalism) to advance a progressive agenda without the bother of consulting the voters.
Damodaran has been a guest on the Capital Record, and, for my part, I have quoted him at length in a couple of Capital Letters. Damodaran’s approach to ESG is forensic, but he does not mince his words.
Here he is, in a blog post from March 2022:
I am convinced that there will soon be room for only two types of people in the ESG space. The first will be the useful idiots, well-meaning individuals who believe that they are advancing the cause of goodness, as they toil in the trenches of ESG measurement services, ESG arms of consulting firms and ESG investment funds. The second will be the feckless knaves, who know fully well the void behind the concept, but see an opportunity to make money. I know that those are not edifying choices, but I don’t see any good ones, other than leaving the space completely. Good luck!
In another piece, I mentioned attending a conference where (speaking remotely) Damodaran discussed ESG. I noted some of his comments:
“I think the whole thing is garbage.”
“It’s very difficult to create a concept that’s empty at its source and toxic at the same time, but ESG people have managed to pull off that trick.”
“This is a concept that was born in sanctimony, nurtured with hypocrisy, and sold with sophistry all the way.”
So what would he say now, nearly a year later?
Born in sanctimony, nurtured with hypocrisy and sold with sophistry, ESG grew unchallenged for a decade, but it is now facing a mountain of troubles, almost all of them of its own making.
Still not impressed, I guess.
Damodaran retells the history of ESG, and the different ways in which it has been sold. It was initially built around a UN document setting out principles for “responsible” investing. It had, he notes, “significant establishment buy-in.” But of course.
However, as Damodaran explains, “goodness” (the original purported justification for ESG) was a hard sell. And so, as he describes it, a new case began to be made: ESG was marketed as a way of delivering higher returns without higher risk. Later on in the article, he adds that ESG was sold as a way of doing well by doing good. When this ultimately proved to be nonsense, ESG’s advocates shifted gears again, claiming, Damodaran writes, that “ESG’s primary purpose is disclosure about material issues.” In other words, ESG was supposedly a way of providing investors with investors with information they needed to know.
Spoiler: It’s not. Public companies are already required to disclose any material risks. Those who argue that ESG should be used as an additional basis for determining what a company should disclose are, in my view, merely trying to force companies to disclose information that can, if it reveals that they have not done enough to go along with ESG’s progressive agenda, expose them to activist pressure to “do better.” As progressive activists’ definition of doing better is more likely to destroy shareholder value than enhance it, handing them this information is not something that any investor should welcome.
Damodaran:
It serves ESG advocates to keep the definition [of ESG] amorphous, since, like the socialists of the 20th century whose response to every socialist failure was that their ideas had never been properly implemented, the defence against every ESG critique is that it is incorrectly defined or implemented.
Sadly, Damodaran’s article is brief (it’s worth going to his blog for more detailed analysis). Nevertheless, he repeats some arguments that are well worth repeating:
If an asset is less risky, it should have lower expected returns. Thus advocates who argue that improving ESG will make firms less risky are directly contradicting other claims that investors will earn higher returns if they invest in high ESG companies…
On the S(ocial) front, like pyromaniacs complaining about the fires around them, ESG advocates, who chose to be arbiters of social good in a world divided on many issues, protest that ESG has been politicised.
As for G(overnance), its presence in ESG has always been puzzling, since it replaces the original notion of corporate governance, where managers are accountable to shareholders, with one where managers are accountable to all stakeholders, effectively making them accountable to none of them.
Meanwhile, also in the Financial Times, Gillian Tett takes aim at ESG’s critics, essentially complaining that they are complaining:
ESG has been weaponised. That is partly down to rising energy costs after Russia’s invasion of Ukraine. It also reflects a rightwing hunt for political weapons to use against the left. Thus in America, fossil fuel companies and other Republican donors have funded campaigns to advance state-level bills to curb ESG investing.
As I alluded to above, the unlovely duo of ESG and stakeholder capitalism are (and always have been) a profoundly political project, but one structured for an increasingly post-democratic age. It would be used as a device to advance broadly progressive goals not by winning over the electorate, but by hijacking corporate and investor money and power. The “rightwing” (dread word) pushback has reflected, in part, disagreement, not all of it strictly ideological, with the objectives of that project. But it has also been a healthy reassertion of basic democratic norms. ESG has not been politicized. It was always political. But now it is the subject of political debate, and that is really what Tett objects to.
She tries to muddy the issue by talking darkly about “Republican donors” funding campaigns against ESG at state level. But that’s the way that politics often works in the U.S. Democratic donors fund campaigns, too. Unsurprisingly, Tett refers to fossil fuel companies helping fund these campaigns. Again, so what? The managements of those companies are doing what they are supposed to do, which is to defend shareholders’ interests. But if we are to talk about the economic interests involved in this debate, surely it is worth mentioning the flourishing eco-system that has grown up around ESG. As referred to above, ESG has been a cash cow for countless rent-seekers, from lawyers to accountants to investment firms to ratings agencies to any number of “consultants.” They represent a formidable lobby to ensure that it moves forward.
Despite the pushback against ESG and disappointments on the climate front, Tett still finds grounds for optimism, including this (emphasis added):
[E]ven though rightwing voices love to bash ESG, few have laid out a coherent competing philosophy — or called explicitly for a return to the shareholder-only mantra of Milton Friedman. I think this is because even rightwing commentators know that it is unrealistic to expect businesses to ignore the social, political and environmental context in which they operate.
Well, rightwing voices must not have been loud enough. A good portion of the rightwing commentary criticizing ESG and, even more so, stakeholder capitalism, has been based on defending or reestablishing the idea of shareholder primacy, which was indeed most famously set out by Friedman in an article for the New York Times in 1970. But Tett’s faint implication that this “mantra” was some fad can be safely ignored. As shown by the judgement in Dodge vs Ford Motor Company (1919), this concept had been around for a long time before Friedman.
Leaving aside the fact that ESG is hardly noted for its “coherence” (or as Tett delicately puts it, “its frameworks are still immature and imperfect”), Tett’s refusal to recognize that ESG’s opponents have a “coherent” alternative is a critical element in the narrative that has been peddled by the FT for quite a while now. Instead, its writers have typically dismissed criticism of ESG as nothing more than rightwing agitation, merely another manifestation of the dreaded culture wars, a dismissal made easier by attacks, however merited, by rightwingers on corporate wokery.
I wrote about this in a Capital Letter back in August 2022:
Some of ESG’s loudest opponents have indeed concentrated on [corporate wokery], even though that is only one element in… a far bigger story. Some have done so out of personal conviction, others, (and the two motives are not mutually exclusive) as a matter of tactics. It’s easier to gin up popular support for a campaign to oppose corporate wokery than to base it on a defense of shareholder rights or a rejection of corporatism, causes with possibly rather less immediate populist appeal. Something similar holds true for those in the opposing camp. It is far easier for defenders of ESG and stakeholder capitalism to frame the debate as another chapter in the culture wars than to address the serious threat to both property rights and to democracy that their efforts represent.
The reference to property rights is, of course, a reference to shareholder primacy. When people buy shares in a company, they become its part owners. That means that the company’s management is (or is meant to be) working for them. And what “working” is supposed to mean is working to generate shareholder return. It does not (or should not) mean using corporate time and money to embark on ideological or other crusades unrelated to the company’s bottom line. Equally, the reason that most people entrust their savings or pension plans to investment managers is for those investment managers to make them as much money (on a risk-adjusted basis) as possible. Contrary to the claims of many of its boosters, ESG, as Damodaran and many others have argued, will not do that, for reasons based on simple logic backed up by a growing amount of inconvenient data.
For example, here’s Steve Johnson, writing in, yes, the Financial Times (September 27, 2023):
Exchange traded funds investing on the basis of environmental, social and governance criteria have not beaten the market over the past decade, analysis has shown.
The findings come despite widespread claims since 2020 that ESG is able to deliver outperformance by steering investors away from poorly run and heavily polluting companies and towards the “winners” of the future. Analysis by Scientific Beta, an index provider and consultancy linked to the Edhec-Risk Climate Impact Institute, suggests that 2020 was a “statistical outlier” and, if anything, ESG ETFs have marginally underperformed their traditional peers. “‘Real-world’ ESG performance is unremarkable, with no evidence of sustainable ETFs outperforming,” Felix Goltz, research director at Scientific Beta said. “Quite often it’s suggested there should be some outperformance. [People say] ‘they are better businesses, they are going to generate higher returns’. That’s clearly not something we see in the data.”
Alex Edmans, professor of finance at London Business School, who is unconnected to Edhec’s yet to be published, Sustainability Alpha in the Real World: Evidence from Exchange Traded Funds, said it “does a good job of highlighting the folly in simple claims like ‘ESG investing outperforms, period’ but these claims should have never been made in the first place as they were based on short-time series with inadequate controls.
Unfortunately, they are lapped up uncritically due to confirmation bias.” Scientific Beta crunched data on every US equity ETF domiciled in either North America or Europe and categorised by Bloomberg as either “socially responsible” or ESG, from 2012 to the end of 2022…
If ESG cannot be relied upon to deliver a superior return, then it is difficult to see why it should play any material role in asset managers’ investment process, except for funds specifically marketed as ESG products.
Can Tett’s failure to note the importance played by shareholder primacy in the growing criticism of ESG be explained by an at times seemingly hazy grasp of what shareholder primacy really is? It would be surprising if so, but in a section of the passage I quoted above, she argues that a reason there has (allegedly) been little call for a return to shareholder primacy is “because even rightwing commentators know that it is unrealistic to expect businesses to ignore the social, political and environmental context in which they operate.” But few of those rightwing commentators would be likely to find any conflict between shareholder primacy and businesses paying attention to “the social, political and environmental context in which they operate,” at least if they used a straightforward interpretation of the word “context.” For companies to pay attention to the environment in which they are doing business is entirely consistent with shareholder primacy, so long as management’s response to what it observes or encounters is always guided by the need to maximize shareholder value.
Read Tett’s next paragraph, however, to find that its last sentence goes as follows:
If Friedman were alive today, I suspect he would argue that companies should watch stakeholders too, to protect shareholders’ interests.
Indeed he would, and indeed he would have done when he was alive too. What he would not have accepted was that shareholders’ property rights in their companies should be diluted by pseudo-ownership rights claimed by various “stakeholders,” such as a company’s employees, its customers, or the “community” in which it is located. Thus fostering good labor relations would be compatible with shareholder primacy, but any suggestion that a company was run “for” its employees would not. I’d guess that most rightwing commentators would feel the same way.
If Tett does understand that shareholder primacy can be reconciled with paying attention to stakeholders (and she seems to), then the interpretation of “context” changes. And so, when Tett wrote that “even rightwing commentators know that it is unrealistic to expect businesses to ignore the social, political and environmental context in which they operate,” was she really saying that these rightwing reprobates now acknowledge that companies have no choice other than to submit, at least to some degree, to social or political pressure to improve their ESG score? If she was, she is almost certainly wrong. Most will continue to do what they always have been doing (even if Tett has not noticed), which is defend shareholder primacy.
And speaking of ESG…
ESG Talk in Miami
Together with the Economic Club of Miami, we will hold a discussion on Wednesday, November 8 on ESG. This will be held at 5:30 p.m. at the new location of Biscayne Bay Brewing, in the Old Post Office building in downtown Miami. I will discuss this vexed topic with Siri Terjesen, Associate Dean at Florida Atlantic University. Anyone interested in attending this event can find out more details here.
The Forgotten Book
Capital Matters has a fortnightly feature, The Forgotten Book, which is written by our new National Review Institute fellow, the writer and historian, Amity Shlaes. We live in an age of short attention spans, and one of Amity’s objectives is to introduce readers to books or other primary sources that warrant a second look.
With her Capital Matters column, Amity will dedicate herself to sharing with Capital Matters readers older, forgotten books, along with new books that aren’t getting the attention they perhaps warrant.
Her latest column can be found here, and is focused on the disaster that befell a party disrupted by a charismatic outsider:
If Republicans have this much trouble choosing a speaker of the House, they can’t consider policy. If they can’t consider policy, they can’t build a strong platform. And if they can’t build a strong platform, they will have nothing to stand on in the next presidential election.
The default will be a mêlée of loyalists of various stripes — traditional Republicans, the odd libertarian, Trump revivalists — and of course, Donald Trump himself. The result is that policy itself will get neglected in the crucial 2024 year, to the enormous detriment of the American economy.
The price of such a free-for-all becomes clear when you go back to another point when Republicans brawled: the year 1912…
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 142nd episode, David was joined by Ash Bennington, author of the brand new book, Crypto Crackup. They go on a deep walk through the FTX/SBF drama, consider what it says about “effective altruism,” and discuss why you shouldn’t ever trust anyone wearing cargo shorts.
No Free Lunch
Earlier this year, David Bahnsen launched a new six-part digital video series, No Free Lunch, here online at National Review. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy…
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson, and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Regulation
Theory: Regulators develop specialized, scientific knowledge of the industries they regulate, and that expertise is necessary for effective governance in the modern world.
Reality: Regulators have decided to ban fireworks based on whether the sound they make is more of a “poof” or a “bang.”…
Since my fellow Republican commissioners and I allegedly “ended the internet” in 2017, average internet speeds in the U.S. have more than tripled. Competition is surging thanks to record-breaking private investment between competing technologies. Consumer prices for internet services have fallen relative to inflation. Streaming services have continued their ascent. And our resilient, robust networks kept America’s economy afloat — providing connectivity to communicate, work, educate, shop, entertain, and so much more — during the global Covid pandemic.
So, after the Left’s previous parade of horribles proved to be pure fiction, what possible case could the commission make for swinging one of its heaviest regulatory sledgehammers at a broadband marketplace that, by any conceivable measure, is thriving.
Not much of a case at all, it turns out.
Despite other pressing policy concerns, the Biden administration really wants to talk about what it calls “junk fees.” It announced a suite of new regulatory actions earlier this month. White House social-media accounts have posted about “junk fees” dozens of times in the past year, with concentrated efforts in February, June, and now again in October to make the issue stick.
If the administration really wants to talk about junk fees, let’s talk about how the government makes junk fees worse….
Antitrust
All this extra paperwork is unnecessary. Regulators can tell at a glance that more than half of proposed mergers pose no anticompetitive threat. These benign deals get something called early termination — meaning that the government’s evaluation gets terminated and the companies can go ahead with the merger. Of the 17,390 HSR transactions filed from 2011 through 2020, 10,153 received early termination. Khan’s FTC temporarily suspended the granting of early terminations in February 2021, and the agency has yet to reinstate the practice.
This means agencies already get enough information to let more than half of deals go through. There is no need to quadruple required paperwork…
In the Department of Justice’s antitrust case against Google for allegedly monopolizing internet searches, lawyers are arguing in federal court about how many swipes and taps it takes to switch search engines.
Apple’s iPhone has Google as its default search engine. Google paid Apple for that privilege. When a user searches in Safari, Apple’s Web browser, that search is run through Google by default.
The OJ argues that this arrangement is illegal because it means Google is monopolizing searches. Some monopoly: You can change search engines on an iPhone with four taps and a swipe…
Argentina
The result of the second round of Argentina’s elections means that the third (and decisive) round will represent a distinctly binary choice…
On Sunday night, Argentines voted in a presidential election that resulted in a runoff, which will take place November 19 between current economy minister Sergio Massa (37 percent) and lawmaker Javier Milei (30 percent). While markets were pricing in the fact that there was going to be no outright winner in this round, Massa’s win came unexpectedly, as almost everyone predicted that Milei (a conservative libertarian) would maintain the small lead he had secured in the August primaries…
Government Spending
“When federal money is involved, local officials often make odd decisions because they are not really accountable for the spending,” writes Mike Nichols, president of the Badger Institute, a Wisconsin-based free-market think tank. A great example of that phenomenon is taking place right now in Milwaukee.
Milwaukee has a streetcar called “The Hop” that opened in 2018…
Government Debt
The Congressional Budget Office estimates that, by mid-century, interest payments on our mountains of debt will eat up 35 percent of tax revenues. But those estimates rely on interest rates near 4 percent. If interest rates stay near 5 percent, we would need closer to 50 percent of tax revenues to pay for old and new debts, leaving less revenue available for government functions like defense.
The bond market sees the long-term fiscal problems, but as the world’s reserve currency, the U.S. has ample access to liquidity. Instead, what set the bond market off has been an avalanche of debt issuance in the third and fourth quarters…
Electric Vehicles
There are all sorts of unresolved issues around EVs (and many of them are not going away any time soon). But if Toyota (or its competitors) can make solid-state batteries work in the way that Toyota is outlining, EVs will be a substantially more attractive consumer product than they are today. The big question, of course, is when this happy moment will arrive.
In the meantime, would-be EV buyers have to decide whether they should hold off a purchase for now on the grounds that a far better EV may be coming along in a few years’ time.
And how much more will other large automakers, currently investing billions in the production of “traditional” EVs, have to spend if Toyota is successful?…
Americans must be an ungrateful, foolish and selfish people, or so some, I suspect, would like us to believe. Despite generous tax incentives, a “boiling” planet, and the technological wonders of our new electric vehicles (EVs), they do not seem to be buying EVs at the pace that has been expected of them….
Economics
In The New Leviathans, Gray elaborates on the economic factors driving this “revolt of the professional bourgeoisie” and specifically the creation of “a lumpen intelligentsia that is economically superfluous” but profoundly destabilizing. Gray notes the work done by the Russian-American social scientist Peter Turchin on the question of “elite overproduction.” One of the consequences of this surplus is, of course, job insecurity (and, for that matter, status anxiety).
Politics
Reagan-Buckley Republicans need new economic-policy ideas to complement the old ones. Looking north of the border to Canada, we see new free-market, conservative, economic-policy ideas that are having considerable political success under Pierre Poilievre, the leader of the Conservative Party of Canada and leader of the opposition. A big part of their success has to do with the fact that while being free-market-oriented, the ideas also are targeted at helping those below the median income who traditionally don’t vote for Canada’s Conservative Party.
Poilievre’s conservative economic-policy platform — largely built on zoning reform to promote housing affordability and on occupational-licensing reform to get skilled immigrants to work — have handed his party a significant lead in the polls. It’s ahead of incumbent prime minister Justin Trudeau’s Liberal Party. If an election were held today, Poilievre’s party would win a majority of seats…
The Economy
First on the short run. In the third quarter, consumers went absolutely nuts, with an increase in consumption adding 2.69 percent to GDP growth. That’s right. If everything else hadn’t moved at all, GDP growth would have been a healthy 2.69 percent just because of consumers. Why have consumers been able to keep binging even when real incomes, according to the Census Bureau, have been declining? The biggest part of the story is that the massive Covid subsidies were mostly placed in savings accounts rather than spent at the time, what with people being locked in their houses and all. Even as prices have risen faster than incomes, real consumption has been able to soar because people have had so much money in excess savings.
The bad news for the near-term outlook is that this excess Covid savings have been just about fully depleted…
After every Federal Open Market Committee meeting, the committee puts out a statement on monetary policy. The statement has consistently (and correctly) said that the Fed remains committed to pushing inflation back down to its 2 percent long-run target. For months, that statement mentioned stressors contributing to inflation such as supply-chain problems and the war in Ukraine. Perhaps understandably, the Fed did not acknowledge its own role in contributing to inflation by pursuing an overly expansionary monetary policy for too long.
Now, though, there’s another contributor to inflation that is making the Fed’s job more difficult than it needs to be: the federal deficit.
That the commercial real estate sector has been in trouble has been obvious for some time now (not least thanks to the persistence of working from home), but the fundamental problem is not that interest rates are dramatically high (they are not, certainly in real terms), but that they were “too low” before…
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