ESG investment shift may not be as pronounced as believed

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Here’s a note from Ken Pucker:

According to this piece by BlackRock “a major shift is underway as companies are increasingly measured not only on how much money they make, but also on the societal impact they are having.” BlackRock sites Sir Ronald Cohen, founder of the IWAI Impact Weighted Accounts Initiative at Harvard, who notes as evidence that “some electric vehicle companies are attracting lofty valuations, while some big oil companies have lost significant value over the past few years.” According to Cohen, the shift to a focus on impact is enabled by (1) the shifting value of consumers; (2) technological innovation such as machine learning and (3) the ability to harness computing power to analyze the impact of companies This push toward impact valuation is endorsed by major accounting firms and some asset managers. Sir Ronald Cohen predicts that all companies will be publishing their impact accounts in 3 to 5 years.

And yet…

– Not all EV companies have lofty valuations. See Nikola, Faraday Future, Electric Last Mile Solutions. Doing good does not always lead to doing well (financially).
– Notwithstanding know negative externalities, big oil seems to be doing well. #Exxon’s valuation is up 2X from last year at the same time
– Impact valuation is complex and imprecise. It is based on subjective valuations (eg. what is the dollarized health impact of sugar in soft drinks, is a flight for vacation worth as much as one for business travel), estimation, extrapolation and centralized valuation of externalities. It also assumes that impact is absolute when it is, in practice, about marginal effects.
– As but one indicator, consider the divergence in ESG ratings….and then apply those same disagreements to non financial impact valuation

While calculating an estimated impact for a company might help investors assess go forward risks (of regulating CO2, for example), it will not much address growing environmental and social challenges…these need to be addressed by changing the rules.