Has ESG Peaked?
Now would be a great time to focus on market returns over politics.
Has ESG Peaked?
Now would be a great time to focus on market returns over politics.
By James Freeman, Wall Street Journal
March 16, 202
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A few years back various Wall Streeters were whispering that the political fad of investing with the so-called environmental, social and governance (ESG) agenda would continue to gain ground until the next bear market. Have the last year’s geopolitical events and investing losses plus recent market ructions finally brought a needed dose of reality? Even today such talk is generally confined to background discussions because Wall Street remains institutionally politically correct. But a welcome change toward focusing on doing right by shareholders may be in the offing. Such a change would also benefit the U.S. economy and human flourishing around the world. That’s because profit-seeking corporations, not politics, represent the most efficient path to fueling, sheltering and feeding a hungry world.
For the uninitiated, the “G” in ESG is highly misleading because this is not about sensible corporate governance focused on the long-term health of a business for the benefit of sharehold-ers. The “E” and the “S” are about serving political agendas on climate and social issues promoted by “stakeholders” who often have no stake in the enterprise. Such influencers are generally seeking to bully companies into enforcing policy changes that voters have rejected.
Even before the recent market tumult sparked by Washington-created inflation and the resulting rise in interest rates, a successful fund manager recently shared with this column a cautious optimism:
Up until recently, ESG was just growing and growing, meaning it was more and more of a focus. It was a focus of investors of funds like ours. It was a focus of corporate chieftains, some of whom spent a lot of effort virtue signalling, you know, [BlackRock Chairman] Larry Fink, et cetera. Other corporate executives were simply kind of run over...
My belief is that ESG has peaked. That doesn’t mean at all that it’s going to disappear. But I sense a spirit in the investing community of a little bit of courage, where even a year ago there wasn’t courage. There was dancing. There was wiggling, wriggling, trying to deal with this amalgam of stuff because clients were saying that it was important to them. Funds and investment managers were trying to deal with it without disrupting their strategy, their approach, their ability to make money.
He notes that the “transition from oil, gas, coal to solar and wind will take many, many decades, if ever, to complete” and adds:
Are you telling [billions of people in Africa, South America, and Asia] that they should do without reasonably priced or cheap energy because a hundred years from now the houses on stilts on the Malibu beach are going to be underwater?
Another issue is that whether one is talking about E, S or G, the manager observes:
There are already tens of thou-sands of pages of law, rule, regulation, regulatory practice that’s maybe not called for on all these topics. Employment, social relations, just everything that goes under the social category, the environment. Look at all the regulations and all the control over environmental aspects, and to put this vague additional layer depending on how people feel... They can feel about anything and then come to the corporate world and say, “We want you to do that. We don’t want you to do that.”
This landscape is extremely complicated. But I think it’s past its peak, and I’m not predicting that it’s going away, but it seems less of a force in investors’ consciousness. Maybe that’s also augmented, or enhanced by the fact that last year was a pretty harsh year and people who had oil, gas and coal did pretty well.
Speaking of fossil fuels, last week Justin Jacobs and Myles McCormick reported for the Financial Times:
After years of getting beaten up as climate villains, the global oil and gas industry celebrated a more friendly shift in “vibes” as thousands of executives, policy-makers and ministers descended on Houston, Texas, this week for the annual CERAWeek energy jamboree.
A year after Russian troops mounted a full-scale invasion of Ukraine, throwing global energy markets into crisis, there was a sense on stage and in conversa-tions over coffee and canapés that the world’s priorities had shifted back in their favour. Energy security was now the phrase on everyone’s lips and the oil sector had its swagger back.
A year after Russian troops mounted a full-scale invasion of Ukraine, throwing global energy markets into crisis, there was a sense on stage and in conversa-tions over coffee and canapés that the world’s priorities had shifted back in their favour. Energy security was now the phrase on everyone’s lips and the oil sector had its swagger back.
“Really loving the vibes here this year. One of the things that we think has happened clearly is a move back to an all-of-the-above approach towards solving the energy crisis,” Toby Rice, chief executive of the US’s largest natural gas producer, EQT, told the Financial Times in a hotel suite temporarily converted into corporate HQ.
It’s nice to be picking up good vibrations for efficient energy production. But let’s not get too carried away, because “stakehold-ers” who have no stake in a business obviously don’t suffer when it falters and may be largely insulated from market reality if the tax-exempt entities supporting them are large enough. Much damage has already been done as political agendas have been embedded in the policies of many Wall Street institutions, and there is no reason to expect the non-stakeholding “stakeholders” to abandon their influence campaigns. In fact this column is told that another conversation occurring in Houston last week was that the ESG crowd, having largely conquered the big banks, is now moving on to apply more pressure to insurers.
So the challenge is significant, But finally there is a rising spirit of resistance on behalf of prosperity and common sense.
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James Freeman is the co-author of “The Cost: Trump, China and American Revival.”