ESG…Just Another Wall Street Scam

Douglas Blackwell Images

According to Salesforce CEO Marc Benioff, “business is the greatest platform for change,” however if we engage in a “culture of phony, derivative, halfhearted, or misguided efforts, it will eventually sink.” Benioff believes that it’s important to have a social purpose, as business values permeate everything we do. Values are the bedrock of resilient companies, which translates to resilient societies. “In the future, profits and progress will no longer be sustainable unless they serve the greater good,” says Benioff.

Therefore, the notion of ESG (Environmental Social Governance) on the surface sounds like a good idea, however, in reality, it has not positively impacted environmental concerns related to climate change and has not had any influence on ushering in meaningful social change. It has also failed miserably on the governance side too. ESG investing in its present form is fake, make it up as you go, a disingenuous misrepresentation. ESG is nothing more than a trendy wall street sales and marketing ploy, to sell more mutual funds to investors that want to feel good about themselves. Furthermore, institutional investors that drive markets most are simply lazy, checking the boxes to comply with their bogus ESG investment mandates.

It is simply about using ineffective, ambiguous, and nonscientific methods, surrounded by a noisy echo chamber to distract from reality, for the sole purpose of driving sales, and higher fees under the spurious narrative of virtue and better returns.

ESG investing has been touted to be a performance enhancer to portfolios but this has not panned out. According to a March 2022 study written in the Harvard Business Review (HBR,) titled, An Inconvenient Truth About ESG Investing, by Sanjai Bhagat, the research reveals that investing in sustainable funds that prioritize ESG goals was supposed to help improve the environmental and social sustainability of business practices that can impact society. Unfortunately, close analysis suggests that it’s not only not making much difference to companies’ actual ESG performance, but it may also be directing capital into poor business performers.

According to the HBR research article. As of December 2021, assets under management at global exchange-traded “sustainable” funds that publicly set environmental, social, and governance (ESG) investment objectives amounted to more than $2.7 trillion; 81% were in European-based funds, and 13% in U.S. based funds. In the fourth quarter of 2021 alone, $143 billion in new capital flowed into these ESG funds.

However, investors have not fared well financially, and have been willfully ignorant to the reality and motivation of ESG investing promotion by fund managers. University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. The highly-rated sustainability-rated funds attracted more capital than the low-rated funds, but none of the high sustainability funds outperformed any of the lowest-rated funds. So, from an investor perspective, and according to the data, ESG funds do not deliver better financial performance, and investors’ capital does not have any impact relative to the social and environmental challenges facing society.

Furthermore, on the governance side, Columbia University and the London School of Economics researchers compared the ESG record of U.S. companies in 147 ESG fund portfolios and that of U.S. companies in 2,428 non-ESG portfolios. They found that the companies in the ESG portfolios had worse compliance records for labour, environmental, and social. It was also discovered that the companies added to ESG portfolios did not even subsequently improve general compliance or environmental regulations. In other words, they did absolutely nothing!

Why is this so, and how did things get so out of control? HBR points out that “there’s some evidence that companies publicly embrace ESG as a cover for poor business performance.” And it seems that investors, especially the institutions are not doing their due diligence by their investment mandates for ESG. A recent paper by Ryan Flugum of the University of Northern Iowa and Matthew Souther of the University of South Carolina discovered that when corporate managers underperformed analysts’ earnings expectations, they often blame their ESG mandates, and invoke morality investing as an excuse. However, when they exceeded earnings expectations, they made few, if any, public statements related to ESG, the report finds.

The evidence is clear, investors gain nothing extra from investing in funds that claim ESG mandates, and their capital has no socioeconomic, and environmental impacts they believe they invested towards.

A July 01, 2022 article in Bloomberg titled World’s super-rich boost ESG scrutiny on greenwashing fears, highlights that investment firms for the world’s ultra-rich, “are increasingly boosting scrutiny of sustainable deals as greenwashing fears mount.” It seems that the clients are getting wise to the scam, as more than half of the roughly 110 family offices that allocate to sustainable areas “aren’t confident they could identify misleading environmental claims about their investments.” The research says that about 53% of those Family Offices surveyed have increased their analysis and due diligence procedures for sustainable investments.

Family offices might help expose and drive change in the fake ESG investing world, as the family offices have surged over the last twenty years, due to booming fortunes across the tech and finance world. These new super-rich individuals are more sophisticated and have environmental and social impact priorities or agendas. Therefore, their capital allocation decisions can become an agent of change — influencing the many institutions that clamour to sell to them, which can ultimately drive real change.

Nevertheless, regulatory scrutiny and enforcement can drive change as well; as evident with the Greenwashing probes ongoing, and the recent raid of Deutsche Bank AG’s asset manager, DWS Group. These actions must ramp up, increasing further scrutiny of sustainability claims. According to Bloomberg Intelligence, ESG investing is expected to surge to more than $50 trillion by 2025, or about a third of global assets under management, therefore, we can’t allow all that capital to be another wall street scam. 50 trillion can have real impacts on real people’s lives, but not unless companies and fund managers are held accountable, and responsible for the claims they make. Without some form of a transparent impact measuring process, and a reliable reporting mechanism in place, nothing will change, and the scam continues.

Family office Mobilis, which oversees the fortune of the Mulliez family behind the Auchan chain of grocery stores — have come out and said “what’s needed is a global standardization of methodologies,” and impact measurement tools. Well, that’s a start! However, the bottom line is that all market participants must adhere to the same standards, with enforcement, and there must be honesty and some basic human decency underlying. Otherwise, this ends up being another wall street scam, where the rich insiders continue to get richer and ordinary people, get scammed.



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Perry C. Douglas

Perry C. Douglas

Perry believes that entrepreneurship is at the very core of solving societies most pressing problems and challenges.