Posted July 08, 2022
By Sean Ring
Is ESG Investing the Most Egregious Sh*t Going?
- Steelmanning the argument for ESG.
- What is ESG Investing?
- Who decides whats ESG and whats not?
- Who guards those guardians?
- A famous UK fund manager wont employ it.
My Joisey Youth and the Unswimmable Hudson RiverMy uncle used to take my cousin and me out on Saturdays quite often during my childhood. It was a fun time. My uncle was young, athletic, and so much fun to roughhouse with.Occasionally, wed head to the Palisades, along the Hudson River directly across from Manhattan. There we could climb, hike, and run around with impunity.One day, my uncle was wistfully reminiscing about how he used to swim in the river as a youngster with his brother.They even fished there! And ate the fish!Ah, the good old days.You may wonder why thats so shocking, especially if youre not from the Northeast.But by the time my cousin and I were running alongside the Hudson in the mid-1980s, it was disgustingly polluted.It smelled like Venice on a muggy day or the Meadowlands garbage dump every time you drive past it.As a boy - and I think our expectations are inadvertently complicit in this - I thought that all rivers running through cities were flowing disgusting sludge.It made sense to me.You run water past industry, and some of the industry runs into the water.Im reminded of Tommy Lee Jones in The Fugitive, who, upon seeing the Chicago River dyed green for St. Patricks Day, asked, Cant they dye it blue the rest of the year?David Walliams, a UK television star, was hospitalized with giardiasis after swimming the 140-mile length of the River Thames in London.Giardiasis is an infection caused by a parasite laying eggs in your intestines which multiply daily. Yuck!But when I visited Sydney Harbour (yes, with u), where the water is crystal blue, and theres not an ounce of pollution to be seen, smelt, or touched, it proved to me clean city rivers could exist.That led me to this question: how did the Hudson River get so filthy?G f*cking E and Jack f*cking Welch, thats how.
The Worst CEO EverIn 2009, Porter Stansberry was pilloried for writing, Today the stock market values GE at $171 billion. In fact, the common stock every single share is not worth one penny. Plan accordingly.He was correct, of course. Investors are still trying to clean up Jack Welchs mess. This was from a man whom CNBC regularly lionized. (No prizes for guessing what the first C really stands for.)By all accounts, he was an abusive, awful SOB of a CEO who just beat the numbers better than anyone else."GE - led by Jack Welch - played and perfected that game as well as anyone, though it ultimately blew up in the company's face," said Bill Fleckenstein.Whats my beef with Jack? WellFrom the EPA website:
Polychlorinated biphenyls, or PCBs, were widely used as a fire preventive and insulator in the manufacture of electrical devices, like transformers and capacitors, because of their ability to withstand exceptionally high temperatures. During a 30-year period ending in 1977, when EPA banned the production of PCBs, it is estimated that approximately 1.3 million pounds of PCBs were discharged into the Hudson River from two General Electric (GE) capacitor manufacturing plants located in the towns of Fort Edward and Hudson Falls, New York. Once PCBs entered the river, they were deposited and mixed with the sediments at many locations on the river bottom and at some locations along the shoreline in the floodplain.But Sean, Jack was CEO from 1981. This isnt his fault!From the Albany Times-Union (the local newspaper):
Welch became personally involved in the company's battle with regulators over PCBs years before he took over the company. He has recounted an incident from December of 1975, when he learned that the state Department of Environmental Conservation was holding a hearing on GE's pollution of the Hudson River, and drove to Albany from his office in Pittsfield, Mass. He said he sat incognito in the back of the hearing room, growing concerned as he watched a GE-hired biologist "coming unglued" as he appeared before regulators.
"He lacked credibility," Welch said in his deposition.
As a result, Welch took over leadership of the PCB battle. Months later, in the spring of 1976, Welch negotiated a settlement with the state of New York that released GE from state liability for the PCB pollution.
The deal called for GE to pay $3 million for monitoring the river's PCB pollution, and $1 million for research.
So, yes, it was Jack Welchs fault. And he fought for the rest of his days as CEO against the cleanup.
Why am I writing all this?
Because I want to steel man the ESG argument.
Steelmanning is the opposite of straw-manning.
Peter Thiel coined the term to mean arguing against your opponents best arguments.
That is, offer your opponents the best way to present their case.
Perhaps you can feel my visceral disdain for Jack Welch coming through this piece.
Or my thinly veiled rage that the 200-mile stretch of the Hudson from Fort Edward to the Battery in New York City is a goddamn Superfund site.
And thats good. Because despite all Ive written above, Im against this new investing fad called ESG investing.
What is ESG Investing?
ESG investing stands for Environmental, Social, and Governance investing. Its the new rage among those in the investment industry having a hard time generating alpha.
From the CFA Institute:
ESG stands for Environmental, Social, and Governance. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics are not commonly part of mandatory financial reporting, though companies are increasingly making disclosures in their annual report or in a standalone sustainability report. Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of these factors into the investment process.
Before you take any of this personally, let me say this: If youve lost a loved one to lung cancer because they smoked 12 packs a day for 50 years, I completely understand why youd hate Big Tobacco and would never invest in it one of those companies.
I get it if your uncle was a drunken mess and you hate alcohol companies. If youre obese and wouldnt invest in MCD despite eating it three times a week ok.
In his book Socialism, Ludwig von Mises, the great Austrian economist, wrote:
If a man drinks wine and not water I cannot say he is acting irrationally. At most I can say that in his place I would not do so. But his pursuit of happiness is his own business, not mine.
Socially responsible investing, impact investing, and conscious capitalism are variants of ESG.
But theyre not as rigorously defined. And I like that.
You make your choices. I make mine.
The main concern I have about ESG is mission creep.
Who decides whats ESG and whats not?
Luckily, we dont have an ESG Council or some such nonsense yet. But there are some guidelines. Ill use the CFA Institute to illustrate:Most of these are pretty common sense. But what if theres a disagreement between money managers over which companies should be included in an index and which shouldnt?Theres a lot of capital at stake regarding those disagreements.Of course, it leads to the age-old question: Quis custodiet ipsos custodes? (Who watches the watchmen?)But Sean, youre conflating personal choice with industrial dumping!Not really. That dumping was a criminal activity that still hasnt been prosecuted.The State failed, as usual. They watched it happen for 20 years, for crying out loud.Right! Now private investors can do the regulating.Fund managers gather assets from private investors and wield power far greater than the sum of those private investors.Thats what Im not happy about.(Incidentally, since I first published this piece last year, Larry Fink changed his tune.)
This UK Fund Manager Gets ESG RightYou may not have heard of Terry Smith, but hes an excellent fund manager from the UK.When asked about ESG, he replied:
There are several problems with factoring ESG into stock selection. One is that so many ESG approaches look at many of the most obvious factors, such as carbon footprint, hazardous waste, use of water, use of plastic, sources of energy, etc, but fail to take into account the fundamental and financial viability of the business. We think you should also look at things such as innovation, product development, revenue growth, and return on capital. There is not much point in having a business that scores highly on conventional ESG factors, but that fails financially or in terms of its products or service.
Another problem I would suggest is a mindless box-ticking approach. The mantra of comply or explain too often gets transmuted into just comply. Take Philip Morris (US: PM), for example. We think it is making a major contribution to the welfare of smokers with its Reduced Risk Product, but we darent include it in our sustainable fund as it will just be met by people hissing Its a tobacco company. Yes, it is, but maybe its also part of the solution to conventional smoking. It would be more productive to have a real debate.
There it is in a nutshell. If youre wondering how good Smith is, heres his track record. (The dates are the British way around, so that last 04/11/2020 is November 4, 2020, and not April 11, 2020.)
To sum it up, Im not a fan of ESG. Its just another label to slap on an investment product to impress people who probably dont even invest.
But that doesnt mean companies should act unethically, illegally, or even immorally.
Its bastards like Jack Welch that ruin places literally or, even, figuratively.
Feel free to withhold your capital from them.
I leave you with this joke about young lovers, perhaps due to Jacks dumping:
I want you to kiss me in a smelly place.
How about Joisey?
All the best,