Why ESG is a good idea disguised as nonsense

As a younger man, I was taken by the teachings of Buddhism for a while.

I am not religious, but I do believe in certain guiding forces based around human nature, which are also very prevalent in the world’s major monotheisms.

One crucial thread to human wisdom, both theist and atheist, is the idea of good things happening to good people.

“Blessed are those who…”

“Treat thy neighbor as thyself…”

In Buddhism, a couplet of teachings in the Dhammapada reads like this:

The evil doer grieves here and hereafter; he grieves in both the worlds. He laments and is afflicted, recollecting in his own impure deeds.

The doer of good rejoices here and hereafter; he rejoices in both the worlds. He rejoices and exults, recollecting in his own pure deeds.

In the English language, we have many sayings which convey similar things.

“What goes around comes around.”

“Treat others as you’d wish to be treated yourself.”

“You reap what you sow.”

“You get out what you put in.”

Or more colloquially, “karma’s a bitch.”

The idea that goodness is its own reward has been a guiding principle of my life, and many others I’m sure.

The Germans have a saying, “der Weg ist das Ziel.”

I first encountered it on a big advert picture a man hiking up the mountain in order to ski down – echoing a common belief among ski-tourers that the walk up is the real reward, not the ski down. It’s an advert for Audi, obviously…

But more commonly, it just means “the way is the reward.”

It’s not what you get at the end, it’s what you give on the way that is truly meaningful.

These kinds of idea have started to seep into the investment and corporate world of late.

On the very broadest scale, I believe that we are in the sticky and bumpy process of transitioning away from shareholder capitalism.

But to be honest… how the hell did we get here in the first place?

Well, it is in many ways ingrained in our culture, language, and history.

From the wool grown and sold here in the UK, funding the entrepreneurs of the Industrial Revolution, through to victory in the Cold War which proved “beyond doubt” the supremacy of capitalism over socialism, we have learned time again that free markets deliver improvements in the wealth of the nation over and above what can be achieved by a centralised authority – elected or otherwise.

But the story really starts in 1970, with an essay by Milton Friedman.

It gave birth to the Friedman doctrine, which states that the only motivation for companies should be profit – for the enrichment of their shareholders.

The essay was even titled, “A Friedman Doctrine: The Social Responsibility of Business Is To Increase Its Profits”.

The Social Responsibility?

What about its responsibilities to its employees and their families? To its suppliers and customers? To the people who live down river or downwind?

If a company screws over its suppliers, fleeces its customers, gives its staff no benefits and poisons the local water and air… it will surely fail.

At least… in theory. In practice? Not so much.

Last week, I wrote about Dark Waters, the film.

Thanks to helpful responses from readers, I learned about the Bhopal disaster, and Erin Brockovich.

We already know about Kodak, and Matt Hancock’s pub landlord.

We know that hundreds of companies have been claiming government and taxpayer money to cover expenses they should’ve been saving for.

Japan came into this crisis with the best capitalised corporate sector of all the developed markets.

Shareholders don’t like that, so it also came in with some of the lowest valuations – despite having a bull market that’s kept pace with the US since 2012.

The concept of saving for a rainy day has been eroded by bailouts and low interest rates.

Companies that spent billions buying back their own shares to line their own pockets suddenly thrust a begging bowl upon national governments.

But the world is waking up to these facts (or at the very least, I am).

The environmental, social and governance (ESG) movement is one representation of that.

Investors are finally realising that there is a whole lot more to a company than its finances.

Who now deserves our capital?

Maersk, perhaps, which a few years ago announced it would be introducing a net-zero container ship by 2030.

This week? It announced that the first carbon neutral vessel would be on the water by 2023 – a seven-year beat.

From the Financial Times: “Chief executive Soren Skou said on Wednesday that what had seemed a “moonshot” then was now a tough but achievable goal.”

Or what about Volvo?

This week it announced 50% of car sales would be electric by 2025 and 100% by 2030.

These are just a couple of cases – out of thousands. All over the world, companies are scrambling over one another to prove, legitimately or otherwise, that they are doing more to help society and the environment than their competitors.

The 17 sustainable development goals outlined by the EU are the driving themes, but the great transition can be broadly summarised in five.

Coal, cars, cows, circles, and caring.

Carbon, transport, food, resource use, and societal change.

How humans approach these five themes are going to define the coming decades in investment.

Investors everywhere are looking to penalise those companies who are harming the world and society we live in, and to reward those who are helping.

From the food we eat, to how we power our homes and business, to the water we drink and the air we breathe – everything is now, finally, getting “priced in”.

And make no mistake – this is driven by consumer preference.

Seventy per cent of consumers say it is important or very important that retailers have good environmental credentials. Half say they are willing to pay more for a product if the retailer is more environmentally friendly than another.

Fifty-one per cent now say they would be more likely to buy from a retailer that is transparent about where its products are sourced from (up from 44% in 2019).

Almost as many (48%, up from 40%) would be swayed by a retailer that minimises its use of packaging materials like plastic, polystyrene, and bubble wrap.

This great transition towards conscious production and consumption is driving the next wave of investments.

Don’t forget that this is being driven by younger people – mainly millennials who in the coming decades are set to inherit $30 trillion from their baby boomer parents.

Millenials are a growing force in investment, and this is where it’s heading.

Investors will “reap what they sow”.

All the best,

Kit Winder
Editor, UK Uncensored

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