The ESG Paradox: A Noble Idea Turned into a Cancer?

In the world of finance, Environmental, Social, and Governance (ESG) ratings have emerged as a significant factor influencing investment decisions. However, recent controversies and criticisms have raised questions about the validity and fairness of these ratings. This article aims to critically examine the ESG rating system, highlighting its potential flaws and inconsistencies.

The ESG Conundrum

The ESG scoring system originated from the United Nations’ Principles for Responsible Investment (PRI) in 2006. The PRI is a set of six principles that outline how investors can integrate ESG factors into their investment decisions. The PRI has been signed by over 3,000 investors, representing over $40 trillion in assets under management.

ESG ratings were initially introduced with the noble intention of promoting sustainable and ethical business practices. The idea was simple: companies that prioritize environmental sustainability, social responsibility, and good governance should be rewarded with higher ratings, attracting more investors.

The United Nations (UN) wields significant influence over the flow of capital and has the power to set international laws. This influence is particularly relevant for companies seeking capital. A high ESG score, which reflects a company’s commitment to environmental, social, and governance issues, can make it easier for a company to secure the necessary funding. The UN has the authority to pass resolutions that impose sanctions or invest in sustainable development projects, further influencing the flow of capital.

Moreover, the UN’s influence extends to major financial institutions like the World Bank and the International Monetary Fund. These institutions have the power to lend money to countries, thereby influencing the global flow of capital.

Non-governmental organizations (NGOs) also play a crucial role in influencing the UN’s decision-making process. Through lobbying, advocacy, and partnerships, NGOs can significantly influence the UN’s agenda. Some of the largest NGOs today, such as Amnesty International, Doctors Without Borders, and the World Wildlife Fund, are key players in this sphere.

These dynamics highlight the interconnectedness of global finance, corporate responsibility, and international governance. The ESG scoring system, initially designed to promote responsible business practices, has become a tool for global institutions to influence corporate behavior. However, this influence is not without its critics, who argue that the focus on ESG scores can lead to unintended consequences and potential harm to businesses.

The Weaponization of ESG Ratings

Despite the noble intentions behind ESG ratings, their application has raised serious concerns. Critics argue that ESG ratings have become a weapon used to bully companies into aligning with certain political and social agendas. Companies that fail to meet the ESG criteria, which are often subjective and lack standardization, are penalized with lower ratings. This can lead to reduced access to capital, affecting their growth and survival.

Large financial institutions such as BlackRock, State Street, and Vanguard play a pivotal role in shaping ESG scores. These three firms collectively control approximately 80% of around $4 trillion in total Exchange-Traded Fund (ETF) assets. This vast control of assets grants them a significant say in the financial market.

Moreover, these firms are the largest shareholders in 88% of the companies listed on the S&P 500. This means they hold a substantial stake in almost nine out of every ten companies on the index. As major shareholders, these institutions can exert considerable influence over these companies’ operations and decisions.

Their influence extends to the ESG scores of these companies. As major investors, they can pressure companies to adhere to ESG standards and can potentially sway the ESG ratings process. This influence can have far-reaching implications, as a high ESG score can make a company more attractive to investors and easier to secure capital.

The Tesla vs. Marlboro Paradox

A glaring example of this inconsistency is the ESG scores assigned to Tesla and Marlboro. Despite being a pioneer in the electric vehicle industry and a champion of renewable energy, Tesla received a low ESG score of 37 out of 100 from S&P Global. In contrast, Marlboro, a tobacco company, received a score of 84.

This discrepancy raises serious questions about the credibility of ESG ratings.

How can a company that contributes to public health issues and environmental degradation score higher than a company that is actively working towards reducing carbon emissions?

In a recent podcast, Farzad Mesbahi sat down with Alexandra Merz, CEO, Investment Analyst, and Founder of L & F Investor Services, to discuss the growing influence and potential pitfalls of Environmental, Social, and Governance (ESG) standards. Their conversation provides a critical examination of ESG, revealing the hidden dangers and potential corruption within this increasingly influential framework.

Merz begins by challenging the notion that ESG is inherently beneficial. While common standards can be useful, she argues that it’s not clear we want a trust, particularly one with biased donors, deciding on these standards. The idea of a single global governing body dictating how every public company should operate from an ESG perspective is concerning. This level of micromanagement can significantly impact a company’s operations and autonomy.

Despite these potential drawbacks, many companies are proudly waving the ESG flag. The reason, according to Merz, lies in the capital markets. Companies, particularly those in need of financing, find it easier to raise money if they conform to ESG standards.

For instance, consider a company like General Motors (GM). If GM were to issue bonds to finance their operations, having an ESG rating could attract more buyers, particularly asset managers with funds that need to be invested. This is because these asset managers, who control mutual funds and ETFs, are more likely to acquire a ‘green’ GM bond. This trend extends beyond large corporations to smaller companies who now need an ESG score to secure a credit line from a bank.

Merz argues that this trend has become the “biggest cancer in corporate financing” over the last five years. The imposition of ESG scores is not a benign development but a significant shift in how companies are financed and operate. This conversation with Farzad Mesbahi and Alexandra Merz provides a critical perspective on ESG, highlighting the need for further scrutiny and debate on this influential standard. You can watch the whole conversation here: Exposing Worldwide ESG Corruption w/ Alexandra Merz

The Political Influence

Another point of contention is the potential influence of politics on ESG ratings. Critics argue that companies that align with certain political agendas are more likely to receive higher ESG scores. This politicization of ESG ratings not only undermines their objectivity but also risks creating a divide in the capital market, favoring companies with certain political affiliations.

Over the past decade, we’ve seen a surge in corporate activism, with companies taking public stances on a range of social and political issues, from climate change to racial justice. This trend reflects a broader societal shift towards “wokeness” — a state of being aware of social injustices and advocating for equality.

The correlation between ESG and “woke” lies in their shared emphasis on social responsibility and progressive values. Companies that score highly on ESG factors are likely to be seen as “woke” because they are taking steps to address social and environmental issues. Similarly, “woke” companies are likely to score highly on ESG factors because their commitment to social justice extends to their business practices.

While some applaud these companies for using their platforms to drive positive change, others argue that businesses should stick to their primary purpose: providing goods or services and generating profits. This latter perspective is where the “Go Woke, Go Broke” concept comes into play.

“Go Woke Go Broke” : Consequences of ESG Initiatives

The “Go Woke, Go Broke” adage encapsulates the backlash against corporate wokeness. It suggests that companies that adopt woke stances risk alienating a significant portion of their consumer base, leading to financial losses. Critics argue that businesses, in their quest to appear socially conscious, often end up polarizing their audience and losing customers who disagree with their political or social stances.

Here are several recent cases involving major corporations:

1. Bud Light: The beer company faced backlash after launching an ad campaign featuring a transgender actor. Critics argued that the company was pandering to a small demographic while alienating a significant portion of their traditional consumer base. The backlash led to a decline in sales, Anheuser-Busch has lost $15.7 BILLION in value. Proving the adage “Go Woke, Go Broke” to be a brutal economic reality for Bud Light. 1(https://www.newsweek.com/rita-panahi-bud-light-viral-twitter-transgender-dylan-mulvaney-go-woke-go-broke-1802022)
2. Netflix: The streaming giant has also been criticized for its “woke” content. Elon Musk, the CEO of Tesla and SpaceX, dismissed Netflix as “unwatchable” due to its woke content, following news of Netflix’s share crash. The criticism suggests that the company’s focus on politically correct content may be driving away viewers. 1(https://www.forbes.com/sites/danidiplacido/2022/04/20/elon-musk-dismisses-netflix-as-woke-and-unwatchable/)
3. The High Cost of Wokeness — Disney
   Disney Chief Diversity Officer Latondra Newton Quits After Pair Of Box Office Bombs Newton’s departure follows two high-profile ultra-woke box office bombs. “The Little Mermaid,” which has been a box office failure after its release last month, featured Black American singer Halle Bailey as Princess Ariel. The movie now faces the daunting task of grossing over $560 million just to break even with its production and marketing costs. This was followed by an even more catastrophic release of the Disney Pixar movie Elemental that features a non-binary character using they/them pronouns. They spent around $200 million making it. It opened with a $29.5 million recoup.
   (https://www.zerohedge.com/technology/disneys-diversity-chief-latondra-newton-quits-after-pair-box-office-bombs)
4. One of the most prominent examples of the “Go Woke, Go Broke” phenomenon is the case of Target. The retail giant’s CEO, Brian Cornell, publicly endorsed the company’s diversity, equity, and inclusion initiatives, which were met with a conservative boycott due to the company’s promotion of LGBTQ+ merchandise. Within just 10 days of Cornell’s statement, Target lost $10 billion, watched its stock price fall daily, and proved yet again that going woke can indeed lead to going broke. In response to the backlash, Target removed some of the controversial merchandise and relocated other items to less conspicuous parts of its stores.
5. Another addition to this list is Amazon’s “The Lord of the Rings: The Rings of Power.” The deviation from Tolkien’s original vision in favor of a “woke” agenda has not only sparked backlash but also potentially contributed to the show’s underperformance. While on the other hand the success of Peter Jackson’s “Lord of the Rings” trilogy lies in its faithful adherence to Tolkien’s narrative and themes. Jackson emphasized the importance of staying true to Tolkien’s messages, resisting the temptation to infuse his own interpretations or political baggage into the epic tale. In contrast, “The Rings of Power” has been criticized for using Tolkien’s world as a platform for unrelated political or social agendas.

These cases highlight the potential pitfalls of corporate wokeness, a lesson that resonates beyond Middle Earth and into the broader context of ESG initiatives and the “Go Woke, Go Broke” phenomenon.. While companies may believe they are promoting inclusivity and social justice, they risk alienating their core consumer base and damaging their Brand.

The Wokeness Virus: A Call for a Cure

The trend of corporate wokeness, while seemingly benign on the surface, can be likened to a virus that threatens the health of businesses and the free market. It distracts companies from their primary purpose, polarizes consumers, and distorts market dynamics. When businesses prioritize political correctness over their customers’ preferences, they risk alienating a significant portion of their consumer base and suffering financial losses.

The cure for this virus does not lie in the pursuit of social justice through performative wokeness. Instead, companies should focus on their core mission: providing value to their customers. Businesses should not be political entities, and they should not treat the marketplace as a political arena.

This brings us to the issue of ESG (Environmental, Social, and Governance) scores. These scores, while touted as a measure of a company’s ethical and sustainability practices, have become a tool for political coercion. They are being used to impose a particular political agenda on companies, regardless of whether it aligns with their business model or their customers’ preferences.

ESG scores are not a reliable measure of a company’s worth or success. They are a distraction, pulling companies away from their primary purpose and forcing them to pander to a vocal minority. Companies cannot please both the ESG community and their best customers at the same time. Attempting to do so can lead to a loss of focus and a dilution of value.

Businesses should not try to be all things to all people. Instead, they should focus on their core competencies, strive to provide value to their customers, and operate in an ethical and sustainable manner. Those that do so will find that they do not need to pander to the woke crowd to be successful.

In conclusion, the trend of corporate wokeness and the imposition of ESG scores represent a dangerous conflation of business and politics. It is crucial for businesses to refocus on their primary purpose and for consumers to critically evaluate companies’ claims of wokeness. Only then can we stem the tide of the “Go Woke, Go Broke” phenomenon and ensure the continued health and vitality of our free market system.