Below is an excerpt from my forthcoming book…
© Mahabodhi Burton
14 minute read
This excerpt is from Chapter 4: ‘Postmodernism and the academic mindset’ and follows on from The Great Reset.
Environmental, Social and Governance practices, (ESGs)
One of the problems of Stakeholder Capitalism is making its goals measurable: the Bank of America report states:
‘Some 90% of major U.S. companies now issue corporate sustainability reports outlining their environmental, social and governance (ESG) practices, compared with just 20% a decade ago. Yet even as companies work to lower their carbon footprints, invest in communities, and support diverse workforces and racial equality, as well as efforts to help protect the environment, what had been lacking was a common set of metrics and processes for measuring or demonstrating results.
’’However, in September 2020, WEF’s International Business Council unveiled in a new approach in Stakeholder Capitalism Metrics for the private sector, by releasing the world’s first standardized ESG measurements. Since their release, more than 200 companies have committed to implementing the metrics, and more than 130 have incorporated them into their annual or sustainability reports.’[1]
During COP26 in Glasgow,[2] the International Sustainability Standards Board (ISSB) was established, tasked with delivering a comprehensive global baseline of sustainability disclosure standards to meet the needs of global financial markets. These standards will set how companies disclose information about sustainability-related factors that may help, or hinder, performance. The need for such guidance was underscored in late 2021 when sixty global businesses representing over EUR 8.5 trillion in assets and employing over 5 million people released an open letter calling for close alignment between mandatory sustainability reporting requirements in the EU, and the global process to launch the sustainability disclosure standards of the ISSB.’[3]
The Bank of America report goes on:
‘Stakeholder capitalism holds that companies must support a wider array of constituents than just shareholders. The magnitude of current global challenges including the ongoing health crisis [the pandemic,] persistent issues of racial and income equality, and an increasingly vulnerable environment have given stakeholder capitalism new meaning and urgency.’[4]
For Capitalism to solve these problems,
‘the United Nations identified 17 Sustainable Development Goals (SDGs), calling for urgent action by 2030 on issues such as climate change, global hunger and clean water and sanitation.’[5]
Klaus Schwab calls this a unique moment in history to walk the talk: and to make stakeholder capitalism measurable:
‘Having companies accepting, not only to measure but also to report on, their environmental and social responsibility will represent a sea change in economic history.’[6]
The Stakeholder Capitalism Metrics, thus created, are arranged into four pillars, outlined in the WEF’s report, Measuring Stakeholder Capitalism:[7]
Principles of Governance –Leaders must ensure the company adheres to its stated purposes, behaves ethically and uses its capital responsibly.
Planet – Covers a company’s commitment to ‘protect the planet from degradation,’ including sustainable use of natural resources and efforts to help counteract climate change.
People – Covers the extent to which a company’s practices support an end to problems such as global poverty and hunger and help ‘ensure that all human beings can fulfil their potential.’
Prosperity – Asks if a company’s practices support people’s ability to live ‘prosperous and fulfilling lives,’ and whether its innovations create both economic and social value for its customers.[8]
The Gaming of ESGs
According to Investopedia, he scores that companies receive influence socially-conscious investors in buying their shares: allowing investors to ‘[put] their money where their values are’[9] although, it being capitalism, there have been problems: like any system, it can be gamed:
‘The rapid growth of ESG investment funds in recent years has led to claims that companies have been insincere or misleading in touting their ESG accomplishments.’[10]
For instance, a Telegraph article[11] points out how auto makers and tobacco companies, through certain calculated gestures, managed to secure better ESG scores than Tesla.[12] ‘Tesla’s goal is to put the world on a path to a sustainable energy future. According to Tesla, that partly requires renewable power generation, battery storage technology, and electrified personal transportation. Tesla does all three of those things which is why it might surprise investors to learn a company with that mission scores just half of the average S&P Global ESG score of 72.’[13]
Tesla scores best on ‘Environmental (E); it doesn’t have the highest score amongst auto-makers, but is by far the largest electric vehicle seller by volume:
‘But E is one letter in ESG. Tesla does fairly well on that metric, scoring 60. That’s better than Chevron’s environmental score of 48. Still, Tesla’s E score lags behind the best auto maker, Volvo. It scores 85 on the environmental portion of the S&P ESG rating. Volvo sold about 163,000 cars in the first quarter. About 29,000 were fully electric. Tesla is the world’s largest seller of all-electric vehicles. It sold 422,875 EVs in the quarter.’[14]
Where Tesla falls down is on social (S) and Governance (G:) it seems like Tesla’s reluctance to ‘play the game’–Musk just wants to focus on making electric cars and getting humans to Mars—is part of the problem:
‘As for Chevron, social and governance scores is where the oil producer caught the EV maker. Chevron scored 42 and 40 on those two metrics, respectively. Tesla scored 20 and 34, respectively.’[15]
Tesla is unique in the way the company functions: one could say that it is a five-star meritocracy: in that it cedes responsibility to all employees who wish to take it, and has a highly skilled and motivated workforce. To employ someone in order to meet a racial or gender equity quota would be disruptive to the productivity of the company and against its whole ethos: it is still somewhat of a mystery why Tesla scores only 20 with its social metric: as of 31 December 2020, 34% of its directors and vice-presidents, 40-50% of its managers, professionals and technicians and 67% of the workforce as a whole were non-white: and 22% of its senior managers, middle-managers, professionals and workforce as a whole were women.’[16]
Disclosure practices might be part of Tesla’s problem:
‘Tesla discloses less information than other companies, according to S&P Global. Scores are, at least partly, built using 61 industry specific questionnaires. “For companies that do not respond, a team of expert analysts fill the assessment questionnaires on their behalf using publicly available information,” reads part of S&P Global’s scoring methodology document.
‘S&P Global puts Tesla’s disclosureu practices in the Medium category. It puts disclosure practices from cigarette maker Philip Morris International (PMI) in the Very High category. That might be one reason Philip Morris’ total ESG score is 84 and its E score is 87.[17]
Woke capitalism and the ESG movement
The Fraser Institute published a paper in 2022, ESG: Myths and Realities: the fallacies undermining energy security,[18] which, while clearly sympathetic to the fossil fuel industry, outlines some of the problems for industry in relying on ESGs:
‘Today’s “wokeness” trend not only affects cultural, racial, and biological identities, but has given birth to the fallacy of “woke capitalism,” underpinned by ESG (environmental, social and governance) tenets relentlessly pursued by elitist CEOs, major financial institutions, and central bankers. Inspired by dubious net-zero climate change projections, these tenets are being used to stifle a vital sector of North American economies.
‘ESG principles restrict entrepreneurs from responding properly to market signals and serving the interests of their customers and shareholders. As James Freeman observed, “ESG is about controlling and forcing behaviours. It attempts to do through capital markets what activists and their government allies are unable to do through democratic processes—using economic force to drive a political agenda.”[19]
‘Politicians tend to follow the whim of the moment, ignoring hard truths about the impacts their actions will have on economic growth. Unlike elected politicians, woke investors are not accountable for the effects of their climate policies. CEOs, bankers, and financial institutions should focus more on basic economics, not virtue-signalling, and leave the evangelizing on climate change to those who have created an industry for the cause.[20]
‘Financiers and corporate chieftains should recognize the distinction between pragmatic prescriptions for economic growth and sophomoric crusades about an issue outside their expertise. A more realistic and expansive approach to energy would help contain inflationary pressures and serve our geopolitical security interests.’[21] (My emphasis)
The danger is that capitalist companies, often virtue-signalling about equality while obfuscating their true impact, sacrifice efficiency: with a real-world consequence on the services they can offer the planet. No doubt, for this reason, Musk offered this tweet:
‘I am increasingly convinced that corporate ESG is the Devil Incarnate.’[22]
Real World Impact
Musk has been vigorous in resisting such practices at Tesla and SpaceX, which makes his companies attractive to high achieving engineers, leading some 3.6 million applications for positions at Tesla in 2022: the two companies are the top two desirable destinations for university engineering students in the US. Tesla’s efficiency is something I wish could be ‘exported’ to sectors beyond engineering. In my view, we need to have a clear understanding of how things work, in general: this principle applies equally to fields such as mental health and ‘the sociological / racial / gender’ landscape. Although these are not ‘hard sciences,’ they have perceivable inner structures, as I outline in the latter part of this book, concerning Buddhism.
In recent years, Tesla has released an annual impact report on its business. In its 2021 report,[23] Musk proposed that instead of ESG metrics a better indicator might be to measure a company’s real-world impact: in its foreword, the report says:
‘What ESG measures today: Investment Risk
Current environmental, social and governance (ESG) reporting does not measure the scope of positive impact on the world. Instead, it focuses on measuring the dollar value of risk / return.
‘Individual investors–who entrust their money to ESG funds of large investment institutions–are perhaps unaware that their money can be used to buy shares of companies that make climate change worse, not better. An obvious example of this is measuring the impact of the automotive industry. One might think that the more electric vehicles an automaker sells, as a percentage of total volumes, the better its ESG score. However, this is not the case. As long as a company continues to slightly decrease emissions of its manufacturing operations while churning out gas-guzzlers, its ESG ratings are likely to go up.
’Vehicle use-phase emissions, which represent 80-90% of total automotive emissions (included in Scope 3 of ESG reporting), tend to be misreported due to the use of unrealistic assumptions or not reported at all.
It’s easy to see why some oil & gas companies rank higher than Tesla on “Environmental Impact.”
‘The most striking feature of the system is how rarely a company’s record on climate change seems to get in the way of its climb up the ESG ladder—or even to factor at all. (ESG Mirage:[24] Bloomberg Businessweek.)’
So, who creates the ESG ratings? The ESG Mirage article tells us. One of the companies that dominates the ESG landscape is MSCI Inc.; the company used to be a bland Wall Street company that made its money by arranging stocks into indexes for other companies that sell investments. Then, in 2019, something changed: the company chairman, Henry Fernandez, had a ‘road to Damascus’ moment: ‘in a presentation in February 2019 for the analysts who rate MSCI’s stock, he said the company’s data products, the source of its profits, were just “a means to an end.”’
‘The actual mission of the company, he said, “is to help global investors build better portfolios for a better world.”’[25] (My emphasis)
Since then,
‘Investment firms have been capturing trillions of dollars from retail investors, pension funds, and others with promises that the stocks and bonds of big companies can yield tidy returns while also helping to save the planet or make life better for its people. (My emphasis)
‘The sale of these investments is now the fastest-growing segment of the global financial-services industry, thanks to marketing built on dire warnings about the climate crisis, wide-scale social unrest, and the pandemic. … For a significant number of investors, it’s a powerful attraction. (My emphasis)
’Yet there’s virtually no connection between MSCI’s “better world” marketing and its methodology. That’s because the ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders.’[26] (My emphasis)
In other words, ESG ratings can be a form of ‘green-washing,’ aimed at investors. Bloomberg Businessweek analyzed the 150 ESG rating upgrades that MSCI awarded to companies in the S&P 500–in the eighteen months up to June 2021. One of them was McDonald’s Corporation, ‘one of the world’s largest beef purchasers, [who] generated more greenhouse gas emissions in 2019 than Portugal or Hungary, because of the company’s supply chain. McDonald’s produced 54 million tons of emissions that year, an increase of about 7% in four years.’
‘Yet in April 23, [the ESG rating company] MSCI gave McDonald’s a ratings upgrade, citing the company’s environmental practices. MSCI did this after dropping carbon emissions from any consideration in the calculation of McDonald’s rating.’ [27] (My emphasis)
‘MSCI’s upgrade of McDonald’s didn’t take into account the company’s greenhouse gas emissions. But they’ve increased steadily.’[28] Market-based emissions over those four years have decreased from 1.5 to 0.6 million tons: consisting of Scope 1 emissions (those produced by its offices and restaurants) and Scope 2 emissions (those produced by the company’s energy providers). However, Scope 3 emissions (those produced by its supply chain: such as purchased goods and services; franchises; and fuel and energy activities) have increased from 49.3 to 53 million tons during that period.
MSCI also gave McDonalds credit for improvements in their packaging material and waste strategy, including the installation of recycling bins at a number of locations in France and the UK, but these countries sanction companies who don’t recycle.
‘In this assessment, as in all others, MSCI was looking only at whether environmental issues had the potential to harm the company. Any mitigation of risks to the planet was incidental.’ (My emphasis)
‘This approach often yields a kind of doublespeak within the pages of a rating report. An upgrade based on a chemical company’s “water stress” score, for example, doesn’t involve measuring the company’s impact on the water supplies of the communities where it makes chemicals. Rather, it measures whether the communities have enough water to sustain their factories. This applies even if MSCI’s analysts find little evidence the company is trying to restrict discharges into local water systems.
‘Even when they’re not in opposition to the goal of a better world, it’s hard to see how the upgrade factors cited in the majority of MSCI’s reports contribute to that goal. In 51 upgrades, MSCI highlighted the adoption of policies involving ethics and corporate behaviour—which includes bans on things that are already crimes, such as money laundering and bribery.
’Companies also got upgraded for employment practices such as conducting an annual employee survey that might reduce turnover (cited in 35 reports); adopting data protection policies, including at companies for which data or software is the entire business (23); and adopting board-of-director practices that are deemed to better protect shareholder value (25). MSCI cited these factors in 71% of the upgrades examined
‘Beneath an opaque system that investors believe is built to make a better world is one that instead sanctifies and rewards the most rudimentary business practices.’[29]
Of the three metrics, Environmental, Social and Governance:
‘Environmental factors are the most deceptive to the uninitiated, because MSCI rates the potential impact of the world on the company, not the company’s impact on the world. For example, “Water Stress” measures whether the local community has enough water for the company, not whether the company is stressing the local water supply. In total, 32% of the upgrades with an environmental factor included this
‘Other environmental factors follow the same good-for-the-company rule, which means greenhouse gas emissions rarely played a role. In fact, only one of the 155 upgrades cited an actual cut in emissions as a factor.
’Some companies with massive emissions, or that have controversial records on climate change, still managed upgrades, including for environmental factors.
’MSCI rates companies relative to their industry peers and sometimes changes the methodologies for these ratings. As many as half of the companies Businessweek analyzed got upgrades for doing nothing but surfing the wave of methodology changes, reweightings, or similar tweaks.
’The most common methodology change was in Governance, because MSCI has found it has the highest correlation with its better-for-investors lens. Including points for “Corporate behavior,” such as having an ethics policy, drove scores higher, even if a company did nothing new.
‘Policies around employment practices, data protection, and board-of-directors structure were other cited factors. Nearly half the upgrades included one or more of these. Criteria such as these explain why almost 90% of the stocks in the S&P 500 have wound up in ESG funds built with MSCI’s ratings.
‘What does sustainable mean if it applies to almost every company in a representative sample of the U.S. economy?’[30]
And Henry Fernandez has done very well out of all of this:
‘One thing it’s meant for MSCI and its leader: a more than fourfold increase in its share price since the start of 2019, when Fernandez introduced his “better world” rebranding. Through his own holdings, that’s likely made him the first billionaire created by the ESG business.[31]
He admits that many investors are unaware of what MSCI ratings actually gauge:
‘Even sophisticated investors can be forgiven for not knowing what’s going on inside the ratings used to build their ESG funds. MSCI’s detailed rating reports are available only to its financial-industry clients. The sellers of ESG funds don’t add much clarity. On the main page of its website for individual investors, BlackRock advertises iShares ESG Aware MSCI USA as offering exposure to “U.S. stocks with favorable environmental, social, and governance (ESG) practices.” It doesn’t tell anyone what “favourable practices” actually means.
’Fernandez concedes ordinary investors piling into such funds have no idea that his ratings, and ESG overall, gauge the risk the world poses to a company, not the other way around. “No, they for sure don’t understand that,” he said in an interview in November on the sidelines of the COP26 climate change summit in Glasgow, Scotland. “I would even say many portfolio managers don’t totally grasp that. Remember, they get paid. They’re fiduciaries, you know. They’re not as concerned about the risk to the world.”’[32]
Or even that fossil-fuel companies are over-represented in its ESG fund than in the standard S&P 500:
‘A Bloomberg Intelligence analysis earlier this year showed that BlackRock’s ESG Aware holds a portfolio that closely tracks both the S&P 500 and BlackRock’s own top-selling S&P 500 fund, with two notable exceptions: The ESG fund has a “sustainable” label thanks to MSCI, and it’s more heavily weighted in 12 fossil fuel stocks than the actual S&P 500. Asked for comment, BlackRock said that the fund is not designed to offer investors the top ESG-scoring companies and that it shouldn’t be compared to the S&P 500.’[33]
It seems like one reason why many portfolio managers are keen on ESG stocks is they get paid more:[34]
‘One other critical difference between the two BlackRock funds: Fees for ESG Aware are five times those for the S&P 500 fund. The ESG fund, now holding $24.8 billion, has grown by about $1 billion a month.’[35]
Greenwashing, a deadly distraction
‘Not everyone on Wall Street is completely with the profits being made by giving investors the impression that they’re contributing to the fight against climate change.’[36]
‘Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, initiated a one-man campaign this year against “green” financial products. “In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it,” he declared in an essay for USA Today.[37] Fancy and others say the emphasis on ESG has delayed and displaced urgent action needed to tackle the climate crisis and other issues, including the widening chasm between the rich and poor.’[38]
Staving off Communism
‘Fernandez has said he views ESG investing as a tool for pre-empting change as much as one for bringing it about:’[39]
‘When he was on a marketing blitz last year to promote what he called the urgent need for the world to more fully adopt ESG investing, Fernandez got on CNBC’s Squawk on the Street, a kind of investment sports show for who’s up and who’s down on Wall Street. “By the way,” he told the hosts, “we’re doing this to protect capitalism. Otherwise, government intervention is going to come, socialist ideas are going to come.”
He went further in his interview at COP26, an interview MSCI solicited as it promoted ESG and a new climate-related data product.
“It is 100% a defence of the free-enterprise, capitalistic system and has nothing to do with, you know, socialism or zealousness or any of that,” he said.’[40]
Concerning actual Climate change amelioration, Musk says ESG needs to be replaced by an analysis of genuine company impact:
‘What ESG needs to become: Company Impact
We need to create a system that measures and scrutinizes actual positive impact on our planet, so unsuspecting individual investors can choose to support companies that can make and prioritize positive change.
’Many ESG ratings evaluate: “Does this ESG issue impact the profitability of the company?” We need a system that evaluates: “Does the growth of this company have a positive impact on the world?”
’This evolution of ESG needs to be championed by institutional investors, rating agencies, public companies and the general public. As the world needs to strive for a substantial positive impact, we won’t be referring to ESG in this report. Instead, we’ll talk about impact.[41]
The chapter goes on to explore Cultural Marxist corporate bedfellows.
[1] ‘A new standard for measuring global sustainability.’ Bank of America. Accessed 21 June 2023. https://about.bankofamerica.com/en/making-an-impact/stakeholder-capitalism-metrics#
[2] The 2021 United Nations Climate Change Conference, more commonly referred to as COP26, was the 26th United Nations Climate Change conference, held at the SEC Centre in Glasgow, Scotland, United Kingdom, from 31 October to 13 November 2021. ‘2021 United Nations Climate Change Conference.‘ Wikipedia. Accessed 21 June 2023.
[3] ‘A new standard for measuring global sustainability.’
[4] Ibid.
[5] Ibid.
[6] Ibid.
[7] ‘Measuring Stakeholder Capitalism: Towards Common Metrics and Consistent Reporting of Sustainable Value Creation.’ World Economic Forum. Accessed 21 June 2023.
https://www.weforum.org/stakeholdercapitalism
[8] ‘A new standard for measuring global sustainability.’
[9] ‘What is Environmental, Social, and Governance (ESG) Investing?’ Investopedia. 22 March 2023.
https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
[10] Ibid.
[11] ‘When tobacco is more ethical than Tesla, it’s time to dump ESG ratings: An ESG cottage industry is now profiting off the trend’s popularity among pension funds.’ The Telegraph. 16 June 2023.
https://www.telegraph.co.uk/business/2023/06/16/esg-investing-ratings-elon-musk-tesla/
[12] Ibid. ‘Based on S&P Global (SPGI) ESG scores updated in May, Tesla still scores way below average, lower than most auto makers and lower than Chevron, which was also added to the index. Tesla scored 37 out of a possible 100. Chevron scored 43.’
[13] Ibid.
[14] Al Root. ‘Tesla Got Added to an ESG Index. But Oil and Tobacco Firms Scored Higher.‘ Barron’s. 1 June 2023. https://www.barrons.com/articles/tesla-chevron-stock-sp500-esg-score-index-bf95e0fe
[15] Ibid.
[16] Tesla Impact Report 2021. p36. https://bit.ly/TeslaImpact2021
[17] Ibid.
[18] Freeman, James. ‘Florida, Utah Take on ESG Farce: If you thought Disney made the ‘corporate social responsibility’ crowd look bad, how about Russia?’ Opinion. Wall Street Journal. 25 April 2022.
https://www.wsj.com/articles/florida-utah-take-on-esg-farce-11650918518, Accessed 12 July 2022.
[19] Ibid.
[20] Adapted from Burney, Derek H. ‘Our Government’s Blind Devotion to Climate Change Is Harming Our Economy — and Our Security.’ National Post. 14 March 2022. https://nationalpost.com/opinion/derek-h-burney-our-governments-blind-devotion-to-climate-change-is-harming-our-economy-and-our-security Accessed 12 July 2022.
[21] Ibid.
[22] Elon Musk. X. 3 April 2022. https://twitter.com/elonmusk/status/1510485792296210434?lang=en
[23] Tesla Impact Report 2021.
[24] Cam Simpson, Akshat Rathi and Saijel Kishan. ‘The ESG Mirage: MSCI, the largest ESG rating company, doesn’t even try to measure the impact of a corporation on the world. It’s all about whether the world might mess with the bottom line.’ Bloomberg. 10 December 2021.
[25] Ibid.
[26] Ibid.
[27] Ibid.
[28] Ibid.
[29] Ibid.
[30] Ibid.
[31] Ibid.
[32] Ibid.
[33] Ibid.
[34] ‘How BlackRock Made ESG the Hottest Ticket on Wall Street.’ Bloomberg UK. 31 December 2021. https://www.bloomberg.com/news/articles/2021-12-31/how-blackrock-s-invisible-hand-helped-make-esg-a-hot-ticket?leadSource=uverify%20wall
[35] Ibid.
[36] Ibid.
[37] Tariq Fancy. ‘Financial world greenwashing the public with deadly distraction in sustainable investing practices: Wall Street is greenwashing the financial world, making sustainable investing merely PR, which is a distraction from the problem of climate change.’ Opinion. USA Today. https://eu.usatoday.com/story/opinion/2021/03/16/wall-street-esg-sustainable-investing-greenwashing-column/6948923002/
[38] Ibid.
[39] Ibid.
[40] Ibid.
[41] Tesla Impact Report 2021.
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