ESG (Without Ethical Intelligence) IS A FRAUD
Respecting Environment, Social, Governance Is a Laudable Objective. Using ESG to Generate Corporate "Goodness" Scores Is A SCAM
What others have said
Resilience is all about being able to overcome the unexpected. Sustainability is about survival. The goal of resilience is to thrive. — Jamais Cascio
Sustainability has to be a way of life to be a way of business. — Anand Mahindra
Greenwashing is a problem. That's why the practice of just sticking a label like ESG on a company or a project isn't good enough. We need to have a systemic approach. We have to approach it from the ground up with systems design, not from the top down with labels. — Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymouth
Win-win arguments promoting both bigger profits and better social returns are illogical. — Robert Armstrong
ESG Investing: Put Your Money Where Your Values Are — NASDAQ
As investing becomes increasingly political, investors will have to balance good feelings against good performance. — Jeff Benjamin
Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages and that’s a really nice place. — Stuart Kirk, Former HSBC Responsible Investing Officer
ESG is a scam. It has been weaponized by phony social justice warriors. — Elon Musk
Meeting ESG standards is not exactly something to wear like a badge of honor. They are malleable and reward companies only if they promote the causes the woke left cares about, which are becoming increasingly fringe and radical. — Adam Brandon1
About
This week, we are addressing a subject, many call it a movement, that has been gaining momentum over the last several years. The subject is the concept of "ethical investing," also known as ESG (environmental, social, governance). Since this publication, Ethical Fire, is all about ethics and ethical intelligence, this is an opportune time to address this movement. Unfortunately, ESG has become increasingly controversial and politicized, as it seems all subjects are these days.
I recently created a course on ESG and its reporting requirements for a national training company. The breadth and depth of my research on this subject is large. As a result, the following discussion will be highly abbreviated. I have, however, provided many references and links for those who want more detail. My objective is to provide a balanced and succinct narrative about the movement.
Our exploration will focus on these four segments.
ESG’s history and emergence
ESG’s essence
ESG’s current state
ESG’s future
ESG’s history and emergence
At its core, ESG is about climate change and its correlate, sustainability. Since its inception in 2004, at the behest of the United Nations, the emergence of ESG has been rapid and profound. ESG’s rise and history can be broken into three time segments, which are marked by significant events.
Beginning – January 2004 Kofi Anan’s letter to all major worldwide banks and the 2005 landmark Who Cares Wins report2
Development – 2006 Principles for Responsible Investment (PRI) and 2007 Sustainable Stock Exchange Imitative (SSEI)3
Current – 2011 Sustainable Accounting Standards Board (SASB) and in 2021 a 1,600-member-PRI and worldwide ESG momentum4
The push for ESG investing and its attendant reporting has been driven primarily by the United Nations, most of the World’s largest banks and large money management firms like Black Rock, with an emphasis on addressing climate change.
As already noted, ESG is an acronym for Environmental, Social, and Governance, which is a framework for assessing the sustainability and “ethical” standards of a company.5
Environmental – refers to an organization’s impact on its operating environment including air emissions, water and energy consumption.
Social – refers to how an organization treats its human stakeholders including employees, suppliers, customers and community neighbors.
Governance – refers to the way in which an organization governs itself and focuses on the composition and actions of the board of directors and its “ethical” practices.
Throughout all three of the ESG components, the focus is on the endemic structures and business processes of the organization. ESG must come from within the organization and built into the way it operates. In other words, ESG must be ingrained into the heart of the organization, which we will cover later in this discussion.
As interest in ESG has grown, so has the need for reporting a firm’s “compliance” with emerging standards. As a result there are many reporting frameworks. Here are the top five.6
GRI – Global Reporting Initiative.
The entire infrastructure surrounding ESG and its reporting is rapidly evolving and organizations and structures are consolidating. The current reporting framework ecosystem is confusing to many reporting entities and will, most likely, remain so for some time.
There is a management dictum that says, “You get what you measure.” ESG scoring models and related protocols are an attempt to measure an organization’s “compliance” with ESG protocols. Here are three examples:7
S&P Global – Standard & Poor’s (S&P) Global ESG Ratings applies S&P’s internal standards to an organization’s ESG “compliance.”
DJSI – Dow Jones Sustainability World Index is an ETF comprising the top 10% of the largest 2,500 companies who have ESG programs.
Refinitiv – Refinitiv ESG Company Scores clearly and factually measure a company's relative ESG performance, commitment and effectiveness across 10 main ESG themes.
There is currently no ESG scoring model or protocol that is universally accepted. Hence, any “compliance” claimed by a reporting organization is not the same as typical regulatory compliance such as with SEC or IRS regulations.
ESG’s essence
Let me say, right from the outset, that I am a firm believer in the concepts and principles that ESG represents. Caring for the “Environment” and engaging in practices that are efficient, efficacious, ethical and sustainable is a no-brainer. In fact, I have never encountered any sentient human who deliberately desired a spoiled environment. I believe I can say without hesitation that 99.9% of us want clean air, clear water, beautiful forests and unspoiled mountain ranges.
The "S" in ESG stands for "Social." The Social dimension of ESG is all about respecting people and treating them fairly. What is there not to like about this idea? Seeking fairness of outcomes in ethical dilemma resolutions is the hallmark of ethical judging. This entire aspect of ESG is the arena of ethical intelligence and its manifestation in relationships. Respecting insignificance is one of the highest achievements of an ethically intelligent life.
The “G” in ESG is Governance. Governance is not government, as the term is commonly understood. In fact, there are a number of definitions of governance. Here are a three:
Governance encompasses the system by which an organisation is controlled and operates, and the mechanisms by which it, and its people, are held to account. Ethics, risk management, compliance and administration are all elements of governance.8
Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.9
Corporate governance is ‘the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations’. It encompasses the mechanisms by which companies, and those in control, are held to account.10
Organizations are controlled or governed through organizational culture. Numerous CEOs of large publicly traded companies have told me that the only way to control a large decentralized organization is through culture. One CEO went so far as to say once you have need for policies and procedures, you have already lost the battle.
Yes, it is always good to have organizational values reduced to writing and internal control/risk management requires written procedures and rules, but if those writings are nothing but words on paper and not embedded into the hearts and psyches of organizational members, failure is inevitable.
ESG’s current state
As much as I am a champion of the ESG movement, I, and many others, are deeply troubled by the current state of affairs. Many do not trust the United Nations on any matter. Unfortunately, the current ESG iteration is a product of not only the United Nations but also the world's largest financial institutions. As result, many, including me, are highly suspicious of the agenda that is driving the ESG movement, as it is currently constituted.11 12
Recently, it has become evident that the World Economic Forum (WEF) and its underwriters are using the ESG movement as a way of enforcing their “new world order reset." Underneath a thin veneer of "ethical investing" we find climate change alarmists and a host of actors who are part of "carbon neutral" organizations. Although there may be merit in considering climate change and carbon dioxide reduction in the atmosphere, many of these organizations have lost credibility with large portions of the world's populace because of their deceptive behavior.
As is wont to happen these days, everything becomes politicized, and people begin taking sides. In the case of ESG, a very worthy movement, this is unfortunate and unnecessary. We should all be pursuing the goals of the ESG movement. As I previously wrote, what is not to like about a clean environment, treating people with respect and kindness and instilling ethical organizational cultures? Regrettably, ESG is not about that these days. There are some who are still holding out hope, but I remain skeptical.13
ESG’s future
In its current incarnation, ESG is headed for a dark future. Some of the most distrusted organizations in the world have their handprints all over ESG—United Nations, WEF, Central Banks, FED, EU, IMF, etc.). As result, the movement is rapidly losing credibility. Perhaps, the final nail in the coffin of ESG as it is currently constituted, is the SEC's proposal to use ESG in the development of a corporate "goodness score" similar to the infamous social scores used in China to control the activity of its citizens.
I will have more to say about this subject in future articles.
Next week, we continue the journey.
Remember, you cannot lie and be ethically intelligent.
Until then, Shalom!
Portions of this post were taken from my book Ethical Intelligence: The Foundation of Leadership. my doctoral dissertation Exploring Ethical Intelligence Through Ancient Wisdom And The Lived Experiences Of Senior Business Leaders
References
Unless otherwise noted, quotations are taken from A-Z Quotes, Goodreads, and Brainy Quote.
Kneopfel, E. (2005). Who Cares Wins: Connecting Financial Markets to a Changing World. In Who Cares Wins 2005 Conference Report: Investing for Long-Term Value (pp. 41): International Finance Corporation.
Principles for Responsible Investment. "What Are the Principles for Responsible Investment." PRI Association. 2006. https://www.unpri.org/about-us/what-are-the-principles-for-responsible-investment
Sustainable Stock Exchange Initiative. "Who We Are." March 2022. https://sseinitiative.org/
Corporate Finance Institute. (2022). ESG (Environmental, Social and Governance): The Framework For Assessing The Impact Of The Sustainability And Ethical Practices Of A Company. In: Corporate Finance Institute.
BoardClic. (2021, April 29, 2021). The Quickstart Guide To ESG Reporting Frameworks. BoardClic. https://boardclic.com/blog/esg-reporting-frameworks/
Alva Group. (2021, 02/02/2021). What Is an ESG Score and How Is It Calculated? https://www.alva-group.com/blog/what-is-an-esg-score-and-how-is-it-calculated/
What Is Governance? (2022). Governance Institute of Australia. https://www.governanceinstitute.com.au/resources/what-is-governance/
OECD. (2022). G20/OECD Principles of Corporate Governance. Organisation for Economic Co-operation and Development (OECD). https://www.oecd.org/corporate/principles-corporate-governance/
ASX Corporate Governance Council. (2022). ASX Corporate Governance. Australian Securities Exchange (ASX). https://www2.asx.com.au/about/corporate-governance
Armstrong, R. (2020). The Fallacy of ESG Investing. Financial Times: Personal Finance Advice & Comment. Retrieved October 5, 2022, from https://www.ft.com/content/9e3e1d8b-bf9f-4d8c-baee-0b25c3113319
Alex Friedman, J. G., Lorraine Spradley Wilson. (2022). Elon Musk Says ESG Is a ‘Scam.’ Why He May Have a Point. Barron’s. Retrieved October 5, 2022, from https://www.barrons.com/articles/elon-musk-tesla-esg-51653336436
Nash, T. (2022). ESG Isn't a Scam. Here's Why. Corporate Knights: The Voice for Clean Capitalism(May 31, 2022). Retrieved October 5, 2022, from https://www.corporateknights.com/responsible-investing/the-inevitable-pushback-against-esg-investing/
October 6, 2022, Volume 2, Issue 39