The week beginning January 1, 2024: The ESG debate (continued), electric vehicles, regulation, the Red Sea, and much, much more.
The week beginning January 1, 2024: The ESG debate (continued), electric vehicles, regulation, the Red Sea, and much, much more.
The title of an article by Andrew Winston in the Harvard Business Review (December 22, 2023), “ESG Is Under Attack. How Should Your Company Respond?” contains not one, but two questions. The first (“how should your company respond?”) is obvious enough, but the second lies just beneath the surface. Who is the “your” in “your company?”
Normally this would be shorthand, nothing more. Plenty of people refer to their employer as “my” company without making any claim of ownership to it. That’s almost certainly how Winston meant it too. Nevertheless, in the case of an article discussing ESG, and by extension, its symbiont, stakeholder capitalism, topics where the question of the ownership of a company and of the relationship between a company’s management and its shareholders are (or ought to be) central, that “your” raises interesting issues, even if only accidentally.
Once upon a time, the answer to a question relating to the ownership of a company would have been straightforward. A company belongs to its shareholders. The implication of that, in logic as well as law, has been established for over a century, is that a company should be run for the benefit of its owners.
And then I read the author’s bio:
Andrew Winston is one of the world’s leading thinkers on sustainable business strategy. His books include Green to Gold, The Big Pivot, and Net Positive.
Hmmm…
Click on the link to The Big Pivot, which bears the subtitle, “Radically Practical Strategies for a Hotter, Scarcer, and More Open World.” It takes you to Amazon and this author bio:
Andrew Winston is a globally-recognized expert on megatrends and how to build companies that thrive by serving the world. Named to Thinkers50 Radar Class of 2020 as a “thinker to watch,” his views on strategy have been sought after by many of the world’s leading companies, including 3M, DuPont, J&J, Kimberly-Clark, Marriott, PepsiCo, and Unilever. Andrew is the author of the bestsellers Green to Gold and The Big Pivot. Andrew’s latest book, Net Positive: How Courageous Companies Thrive by Giving More than They Take (co-authored with renowned CEO Paul Polman), is a finalist for the Financial Times & McKinsey Business book of the Year Award. Andrew is also a respected and dynamic speaker, reaching audiences of thousands at executive meetings around the planet. He received degrees in economics, business, and environmental management from Princeton, Columbia, and Yale.
So, Winston’s latest book, Net Positive, was co-authored with the “renowned” Paul Polman, the former CEO of Unilever. I wrote about Polman in January 2022, after he had written an article for the Financial Times. I described that article as a “corporatist manifesto,” in which Polman appeared to see CEOs as philosopher-kings, guiding us all to a better place. With Unilever currently not faring so well (Polman, it should be noted, left the company at the end of 2018), I wrote a Capital Letter (Unilever and the Hubris of Stakeholder Capitalism) late last year in which I looked at the malign consequences of the intellectual legacy that Polman left behind.
Net Positive had, I see, also won the approval of both the relentlessly preachy Financial Times (home of the revoltingly self-righteous “Moral Money” section: “The trusted destination for news and analysis on the role of business and finance in the drive for a cleaner, fairer capitalism across the world economy”) and McKinsey, one of the leading rent-seekers in the flourishing eco-system that has grown up around ESG.
At the bottom of his bio in the HBR, Winston also gives his Twitter handle. I went over there too. His header reads:
Inspiring co’s to solve the world’s challenges. Adviser/speaker/author (Net Positive, Big Pivot, Green to Gold. @Thinkers50 2021 top 50 thought leaders.
I don’t know, but something is telling me that Winston is part of that ESG eco-system too.
Scroll down to this tweet:
Just pinning this. Leaving @Twitter as it becomes haven for mis- and dis-information. Will keep account for now in case sanity returns.
Of course.
Winston announced that he was going to give Mastodon a try (naturally), but also linked to his entry on LinkedIn. There he describes himself as
Co-Author, Net Positive. Adviser/Speaker on megatrends & sustainability; Ranked the #3 management thinker in the world (with @PaulPolman) by @Thinkers50; Board Trustee @Forum for Future
Talks about #esg, #netpositive, #climatechange, #businessleadership, and #sustainablebusiness
Somehow I reckon that Winston might not view shareholder primacy as favorably as I do.
But let’s take a look at the article:
In working with organizations, I see executives — from the CEO on down — struggling to avoid being a target [for the “anti-ESG movement”], while staying true to their values and public commitments [on corporate sustainability]. They know customers, employees, and other stakeholders are watching.
Oh dear.
Missing from that list (or buried within “other stakeholders”): Shareholders.
If there’s one group’s scrutiny that executives “from the CEO on down” should care about, it’s that of the company’s shareholders. When it comes to “stakeholders” (a red flag of a word that, as I’ve mentioned before, conveys a sense of ownership when there is none) different considerations apply. A company’s executives ought to pay attention to the ideological views of their customers and employees, but only to the extent necessary to secure, defend or improve the company’s bottom line. If those executives are doing so to promote an agenda unconnected to the bottom line, they are on the wrong track.
So far as an executive’s “values” are concerned, if that refers to honest dealing, keeping within the law, doing their best for their shareholders, or observing what Milton Friedman referred to (in his, well, renowned, article on shareholder primacy) as “the basic rules of society…embodied in ethical custom,” fine. But beyond that, it’s hard to see why we should feel much sympathy for executives who believe that their “values” are at odds with the values and/or activities of the company they work for. If they feel that strongly about them, they should quit.
As its title would suggest, Winston’s article is aimed at giving some guidance to “corporate leaders” concerned that their (yes, yes) company is under attack from anti-ESG forces. The article’s central point is a taxonomy of critics of ESG and sustainability, concepts that, Winston correctly observes, are often muddled:
For me, “ESG,” which stands for environmental, social and governance, mainly refers to the investor-led movement to understand how social and environmental issues create risk for a business. It’s about helping investors assess a company as an investment. ESG also refers to a fast-changing area of corporate financial reporting, as mandates to disclose material environmental and social risks are multiplying. Meanwhile, “sustainability” covers a much broader perspective on a company’s role in society, whether it’s operating within the limits of the planet, and how it helps (or doesn’t) solve major environmental and social challenges. But the two ideas are constantly conflated, which causes confusion.
We could debate whether ESG, a concept first cooked up by members or advisers of a United Nations program, is now truly “investor-led.” In one sense, maybe, but it depends on how the word “investor” is interpreted. Certainly, the funds advised by, say, BlackRock are investors in the companies in which they invest but the “real” investors are those who have put their money in those funds. Most of those underlying investors will have done so in the hope of maximizing a risk-adjusted return compatible with their investment objectives, nothing else.
The investors who “lead” ESG have other priorities. Then again, they are, for the most part, playing with other people’s money. Moreover, they will often be drawn from a similar managerial class to those running large companies, with whom they can thus be expected to share, at least to some extent, political and cultural values. This helps explain the growing adoption of stakeholder capitalism by the C-suite. Stakeholder capitalism replaces shareholder primacy with a corporate duty to a shifting list of stakeholders. This list does include shareholders, but only as one class of stakeholder.
And ESG, as it now stands, is not about maximizing return or reducing risk (it is unlikely to do either over any sustained period), but about the pursuit of using a purported investment “discipline” to pursue a generally progressive agenda. Stakeholder capitalism takes a different route towards the same end, but once again with other peoples’ (in its case, shareholders’) money. ESG, it should be added, can be a good source of income for those who promote it, and a source of political power too. Stakeholder capitalism can also reward those who adopt it with power and money.
Winston is right that ESG and sustainability are often muddled and, in theory, sustainability is rather different from ESG (and, to a lesser extent, stakeholder capitalism), but in practice, the two share similar agendas and the conflation between them is likely to increase, at least for marketing purposes, as the reputation of ESG deteriorates.
Not for the first time, I’ll quote from an observation made by Aswath Damodaran, Professor of Finance at New York University Stern School of Business, on March 28, 2022:
So, what will the next big thing be? I don’t know for sure, but I am willing to make a guess, since so many ESG experts and advocates have slipped into already using it as an alternative. It is “sustainability “, a word that can mean whatever you want it to mean.
Winston, however, prefers to maintain the distinction between ESG and sustainability. Indeed, he has to: ESG becomes much more difficult to defend if it is (explicitly) about more than defending or increasing investor return. And so the advice Winston gives in the article (which should be read in full to get its full sense: I have only covered part of it) is intended to help corporate leaders distinguish between what he sees as a relatively narrow critique of ESG and “attacks on companies a proxy for a larger battle against the full sustainability agenda (perceived by some as inherently liberal or progressive).”
“Perceived by some?”
Come on. “Sustainability,” as currently understood, is undoubtedly progressive. Winston’s definition of sustainability includes a reference to “planetary limits,” a key premise underlying much of today’s environmentalism, but (other than in the crudest sense) one based on an illogical and ahistorical certainty, an article of a distinctly progressive faith. Winston’s definition of sustainability also involves looking at how a company “helps (or doesn’t) solve major environmental and social challenges,” wording, particularly its latter section, and within this context, more associated with progressives.
Winston divides ESG and sustainability’s critics into four groups, although, as he recognizes, the distinctions between some of them overlap or are blurry.
There are those Winston believes act in good faith. These fall into two broader categories. The first are those are the “authentic” critics of ESG, acting in good faith. Mysteriously they appear to be more or less on his side, ideologically. They would essentially like to play the ESG game more efficiently, more effectively and so on. And then are the socially conservative critics of sustainability, who Winston regards as sincere, despite his disagreements with them.
And then are those critics who are, Winston maintains, arguing against ESG in bad faith. He defines some as follows:
For some, the rise of ESG funds is a threat. They don’t want to see the world use the leverage of finance and reporting to address shared challenges; it would reduce their power. This is mainly two groups: 1) fossil fuel companies that are being screened out of funds and want to slow action on climate change; and 2) some traditional investors, steeped in shareholder primacy and obsession with short-term profits, who don’t care if ESG makes sense. These groups want to continue making money the way they know how.
These villains don’t want “the world” (however that is defined, and whoever is supposed to be representing it) to “use the leverage of finance” (other people’s money) and “reporting” (the use of regulation designed to protect investors to pursue an agenda that, in reality, if not in name has very little to do with investor protection) “to address shared challenges” (the attitude towards these supposedly “shared challenges” seems to vary immensely between, say, the EU and China).
Two principal groups are named. The first are fossil fuel companies, objecting to “being screened out of funds.” These companies apparently have the effrontery to resist the attempts to reduce their access to capital being organized, primarily, by a largely unaccountable cabal of activists, financial institutions, and state pension funds. One of the complaints about ESG is the way that it represents a use of other people’s money to advance a political agenda without going through the usual democratic process. If the fossil fuel companies are to be squeezed out of business that is a decision for democratically elected legislatures.
The second group are disdained as “traditional investors, steeped in shareholder primacy and obsession with short-term profits.” But shareholder primacy is nothing more sinister than the requirement that a company’s management is supposed to act in the interests of those that hold the company’s shares. Unless the E in ESG is to stand for expropriation, it is hard to see any substantive objection to that. And, grumbling about the “obsession” with short-term profits is, I fear, little more than financial illiteracy. There are almost as many views on investment as there are investors. Some are patient, others less so, others still are agnostic on time, and focus on the valuation of a company when compared with its prospects, whether in the short, medium, or long term. There is, however, little to be achieved by fetishizing long-term investment as a good in itself, however useful that argument may be as a device for money managers to explain why, just for now, they are not delivering good performance. The relative dynamism of the U.S. economy owes a great deal to the disciplines of shareholder capitalism, and those disciplines are broad enough to incorporate different views on how long it is acceptable for an investment to work out. Besides, were the investors who years ago put money into Tesla, Amazon, or Google “obsessed” with the short term?
Winston argues that “traditional investors…don’t care if ESG makes sense.” On the contrary, they do care. If ESG made sense — if it made them money and/or reduced risk — they would adopt it without pausing. Unfortunately, as many of them who did, in fact, put money into ESG have discovered, that’s not how it has been working out.
To return once more to Aswath Damodaran, here he is again in March 2022:
ESG is, at its core, a feel-good scam that is enriching consultants, measurement services and fund managers, while doing close to nothing for the businesses and investors it claims to help, and even less for society.
He’s not wrong.
Winston then identifies another group of miscreants supposedly acting in bad faith, the political exploiters:
The political actors (individuals, coalitions, interest groups, and pundits) who publicly criticize “woke” companies and pursue mainly regressive legislation.
As I have written on various occasions, including this Capital Letter from August 2022, I don’t think that focusing on corporate wokeness is the best way for critics of ESG to go, but I understand why they do, and I understand too why their opponents like to focus on this issue as well.
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.
I’ll stick with that.
If managements adopt “wokery” in order to benefit their employers’ bottom line, they are fulfilling the duty they owe their shareholders. The same would be true of of some companies taking a more conservative approach, but otherwise businesses would do best, especially in terms of any proselytizing to the outside world, to sit these issues out (this would not be Winston’s advice).
In this connection, it was interesting to read this.
Jonathan Turley, writing in the Hill:
In its annual SEC report, Disney acknowledges that “we face risks relating to misalignment with public and consumer tastes and preferences for entertainment, travel and consumer products.” In an implied nod to Smith, the company observes that “the success of our businesses depends on our ability to consistently create compelling content,” and that “Generally, our revenues and profitability are adversely impacted when our entertainment offerings and products, as well as our methods to make our offerings and products available to consumers, do not achieve sufficient consumer acceptance. Further, consumers’ perceptions of our position on matters of public interest, including our efforts to achieve certain of our environmental and social goals, often differ widely and present risks to our reputation and brands.”
Despite that warning, Disney does not seem to have any interest in abandoning its “position on matters of public interest, including [its] efforts to achieve certain of our environmental and social goals.” Questioning whether it should (beyond what is required by law) have such positions, or “environmental and social goals” would, within Disney (who, incidentally, do its managers think they are?) probably be an act of career suicide. And for outsiders to ask such questions would, of course, be in “bad faith.”
The optimists are wrong. It’s too soon to assume that ESG has peaked.
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 151st episode David is joined on the inaugural 2024 episode of Capital Record by Dan Clifton of Strategas Research. There is no one you will want to hear from more than Dan when it comes to the intersection of public policy and markets, and this discussion is bound to make you smile, laugh, scream, cry, and even reach out for help.
The Capital Matters week that was . . .
Electric Vehicles
In Canada, despite massive government subsidies of new electric vehicle purchases and EV battery plants, as well as considerable government spending on EV infrastructure, the EV market still makes up only 13.3 percent of new vehicle registrations. I write “only” 13.3 percent, but the federal government somehow managed to interpret from this statistic that in double-quick time, 100 percent of Canadians will want to drive nothing but EVs. It cited the statistic as part of its newly announced mandate that by 2035, 100 percent of new vehicle sales must be electric or plug-in hybrid. The government also announced interim targets: From 13.3 percent last quarter, EVs must account for 20 percent of the market by 2026, and at least 60 percent by 2030. Dealers who fall short of these quotas face heavy financial penalties: They must either buy EV “credits” from other automakers or pay for public EV charging stations.
This is madness…
Electric vehicles (EVs) are the gift that keeps on giving for Beijing, if not for Western motorists, Western automakers, or Western geopolitical interests. Most EVs (for now, anyway) offer an inferior experience for most (but, to be clear, certainly not all) Western drivers when compared with traditional cars, especially when backing infrastructure (especially for charging, although Tesla’s network is good and getting better) and price are taken into consideration. On top of this, the mandated displacement of the internal-combustion engine is destroying the advantages of incumbency enjoyed by Western carmakers, which, up until recently, were focused — strange as it may seem — on what consumers actually wanted to buy.
And then there’s the small matter of China’s domination of the EV supply chain…
Sierra Dawn McClain of the Wall Street Journal rode along with a California truck driver in an electric big rig. Surprise: Electric trucks are worse than diesel trucks…
The Red Sea
As if right on cue with Noah’s calling out the Biden administration’s weakness this morning, global ocean carrier Maersk has again announced it is indefinitely pausing shipments through the Red Sea.
The Red Sea is vital to global commerce because it acts as the passageway between the Indian Ocean and the Suez Canal, which connects to the Mediterranean Sea. The Suez Canal saves time and fuel for ships sailing between Europe and Asia. The alternatives to using the Suez Canal are to sail all the way around the southern tip of Africa or go around the world the other way through the Panama Canal…
The fading of the Pax Americana will not be cheap.
Regulation
Ranking 16th, the U.S. is not among the low-regulatory-cost countries. The Crains’ analysis of GDP data from 2000 to 2022 suggests that if regulatory costs in the U.S. were reduced to match the average of the five least-burdened countries, U.S. GDP would increase by approximately 8 percent. Eight percent of GDP is about $2 trillion per year or $15,000 per household per year…
School Choice
Looking back on 2023, I would label rapid advancements in artificial-intelligence technologies (namely the adoption of large language models like ChatGPT) and the approval of a Malaria vaccine with 75 percent efficacy as two of perhaps the most important positive developments in the world. But within the U.S., one large development well worth highlighting is the massive expansion of universal school choice across many states…
Energy
We’re used to beauty-pageant winners supporting some anodyne cause “for the sake of the children” or parroting the environmentalist movement’s narratives, but how about writing an op-ed for RealClearEnergy in support of nuclear power?…
The Debt
It doesn’t really mean anything except that round numbers make good headlines, but it’s true nonetheless.
The federal government ran a deficit of $2 trillion last year for no apparent reason. Politicians are keeping their promise to ignore the debt and keep spending. The mother of all fiscal cliffs is coming in 2025. All true whether the really long number starts with a 33 or a 34 (or, in about six months at the pace we’re going, a 35) …
Defense Stocks
The entertainingly cynical story (which I have cited before) that the stock in the British engineering company Vickers, a leading defense contractor, fell after the Munich agreement with Hitler was settled, prompting a headline in the Financial Times that the Vickers share price had been hit by “peace fears” may or may not be true (probably not), but it is a useful reminder that the stock market can be a cold, cold place…
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