ESG-related things to be wary of…

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Here’s a note from Alison Taylor worth reading:

Lots of damning points on the “ESG Industrial Complex” from Robert Armstrong this morning, all of which I have sympathy with. He points out:

– A constrained portfolio will never outperform an unconstrained one

– Divestment just forces “dirty” assets into private hands

– That ESG entirely failed to predict the Russian invasion, but “taking a bigger picture perspective, using the benefit of hindsight to keep expanding ESG to include the missed variables in each crisis will lead to measurement bloat, as it grows more tentacles and adds more dimensions. Ultimately, if ESG tries to measure everything, it ends up measuring and meaning nothing.”

– That the new SEC disclosure requirements don’t necessarily reduce emissions, but will instead “endless financial disclosure and compliance work”

In summary, he argues that ESG is a “giant, gross gravy train for fund managers, consultants and marzipan layer technocrats”.

Hard to disagree. So, back to normal?

No. Because despite all this, we’ve still got a problem. The rise of ESG reflects the fact that there are **real changes in the world** that our dominant mindset and approach are not well placed to deal with: greater understanding of the negative externalities from business, much greater pressure for companies to manage these externalities, far more transparency which makes it harder to get away with poor practice, employee pressure, new aspirations for our careers political dysfunction, new legal risks, huge social media pressure, and so on.

Companies need to ignore the ESG ratings industry as it is no guide to a good strategy. Then they need to have meaningful values that aren’t always a convenient win win, get much smarter about the operating context, identify and manage negative impacts, focus on a maximum of three areas where they can generate positive impacts, stop treating disclosure as bullshit PR, and actually try to advance a conversation where we understand this is complicated. There is no such thing as a “good” company, and the important thing is the direction of travel.

Whether ESG is a good way to make a quick buck is the focus of all our attention, but is just noise in the system. The underlying drivers are not going away, no matter how many skeptics write columns about how this is all a stupid craze.