Tag Archive for: ESGHypocrisy

The Scam Called ESG

/in , , , , , , /by
Estimated Reading Time: 3 minutes

What is this thing called ESG?  It stands for Environmental, Social, and Governance. Sounds great, doesn’t it? What could possibly be the harm of seeking to promote these virtues in our corporations? I mean, seriously, who doesn’t want companies that seek to emulate these values? I will be the first to admit that when I first heard of it, it sounded like a good idea. How can it be bad?

The main problem lies in their root: they are all completely subjective measures. There is no empirical methodology for applying these value scores to a company. It begins with a failed investment banking analyst who is tasked with scoring companies on these values. Why ‘failed’? Because if they were any good at evaluating industries and companies, they would still be doing it.

And since ESG is subjective by its nature, the movement has been hijacked by the left and its subjective values. A company that mines coal with US labor gets a poor score, while a solar panel manufacturer in China that uses slave labor and is owned by a dictatorship gets a high score. How does that make any sense?

Let’s begin by looking at the energy industry. By their own admission, almost every ESG analyst will state that an energy company is ‘bad’ because they employ fossil fuels for the bulk of their energy creation. Thus, all of the major banks in this country will no longer offer credit and financial services to these firms (they want to preserve their own ESG scores). Almost all oil drilling and exploration on public land have been terminated because using fossil fuels will destroy the environment. By starving the industry of capital and reducing production on public lands, ESG will create its own energy crisis.

The new definition of ESG is this:  Energy Shortages Guaranteed.

In the world of the ‘woke’ ideologues who promote this line of thought believe it is better to have places like Venezuela and the Middle East supply our oil than it is to get it here. This is in spite of the fact that the USA has greater oil reserves than almost any other nation on earth. We also are much cleaner producers.

Moreover, if fossil fuels are such a danger to the earth, why does Venezuelan or Saudi oil get a pass? Does the earth know the difference? Are these countries not part of the global ecosystem?

The solution to this self-inflicted energy crisis is to encourage the use of electric vehicles (EVs). It may come as a surprise to learn that EVs are not all that ‘green’. The most obvious example is fueling these EVs. Charging your Tesla overnight is the energy equivalent of having 15 refrigerators running in your kitchen overnight. There are other, less obvious, reasons for promoting the use of EVs: the most practical is that it reduces your ability to travel independently – you can only travel to places that will make charging stations available (currently limited to the most populous areas). And, by the way, where will the additional power to fuel these vehicles come from?  Our energy grid is currently at capacity and has trouble maintaining current demand and it is mostly derived from fossil fuels.

Bear in mind also that the very people who decry the use of fossil fuels almost all fly on private jets for their travel needs. When do you suppose President Obama or Leonardo De Caprio last took a Southwest flight? Remember that flying on a private plane pollutes 5 to 14 times more than commercial jet travel per passenger. Yet these ‘woke’ proponents of ‘green’ policies still preach to us about reducing our energy footprint while they ignore it completely. And by the way, if global warming, the ice caps melting and climate change are going to flood the world’s shorelines, why do they all live on oceanfront properties? But I digress…

Back to ESG. At its core, it is simply another way for our leaders to control things. If it were an honest measure of ‘goodness’ it would excoriate any firm doing business with the nation of China – one of the worst human rights violators on the planet.

While it is only in its nascent stages, ESG is still nothing more than a social credit score applied to businesses. Who makes up these scores? What are the criteria? And how long will it be before employees of companies are scored on their ESG evaluations? How long will it be before we all are tagged with a social credit score?

The Rise of ESG, Replacing Profits with Paternalism, and Strategy with Standards

/in , , , , , /by
Estimated Reading Time: 5 minutes

The movement for creating systemic change in the economic system is growing. Traditionally, investments in entrepreneurial ventures were based on expectations for a favorable return given the risks involved. Businesses were expected to perform at their best to ensure shareholder value, and to do so they needed to cater to consumer needs, efficiently leverage resources, and effectively manage their operations.

Presently, however, businesses are expected to have a social impact – and it is this impact that is being positioned to matter most. More than production, more than consumption, and even more than shareholder value.

For-profits are increasingly embracing the concept of conscious capitalism and stakeholder integration, which the likes of John Mackey and Sir Richard Branson have not only championed but built movements around, calling on businesses to have a “Higher Purpose” and commit to creating a “better world”.

At face value, this sounds like not only a good thing but a strategic move given that consumer preference leans toward firms that aim to have a social impact rather than simply sell a product.

R. Edward Freeman, the proposed father of Stakeholder Theory, asserts that firms must align the interests of all stakeholders while doing what they can to avoid tradeoffs. His 1984 publication, Strategic Management: A Stakeholder Approach, spurred on a mission to transform business practices toward more noble pursuits.

From Villain to Social Guardian

In 1987, the World Business Academy was launched dedicated to the proposition that businesses can’t be trusted since the corporate realm was “behind every major problem.” A change needed to occur.

This negative notion of the impact of business attracted others to come up with their own stance on the matter. John Renesch coined the phrase “conscious capitalism,” John Elkington promoted the Triple Bottom Line – representing people, planet, and profit, and Michael Porter developed the concept of shared value, which proposes the meeting of a social need with a business model.

To be sure, many have stressed the role of business in society to be more than just about making money, and forms of corporate social responsibility (CSR) have both expanded and evolved in response.

When the concept of CSR first came about, it was applicable to larger firms that had the ability to utilize their wealth and success for giving back – by volunteering, giving to charities, and even partnering with NGOs. However, CSR is no longer about giving back, or even paying it forward – it is about engagement with social issues – and this is now expected of all firms.

The Push for SDGs and Rise of ESG

The pressure to ‘do good‘ is not only based on reputational concerns from private actors but derived from a broader, more politically charged global movement.

In 2000, the Millennium Summit took place in New York City at the United Nations, and was the largest gathering of world leaders at that time. The purpose of the Summit was to determine the ongoing role of the UN and propose new goals for creating a better world.

As a result of the Summit, public officials signed the Millennium Declaration, which outlined eight Millennium Development Goals (MDGs) to be achieved by 2015. And given that a primary focus for the UN was eradicating poverty, engaging with the financial sector became a crucial component.

At the bequest of the UN Secretary-General at that time, Kofi Annan, a study was commissioned to make the business case for corporate commitments to social initiatives, and in 2006 the UN called upon countries to become signatories to its Principles for Responsible Investment (PRI). For those who signed on to the PRI, the standards proposed required firms and capital markets to take part and do more for the global good.

After 2015, the MDGs morphed into the Sustainable Development Goals (SDGs), and the PRI prompted the creation of ESG frameworks. Both the Sustainability Accounting Standards Board (SASB) and the World Economic Forum (WEF) promoted efforts for instituting “a globally accepted system for corporate disclosure” to track the progress of the SDGs and pressured financial firms to implement ESG metrics as proof for doing their part.

The adoption of ESG standards, however, is truly problematic given that value and virtue are difficult to measure and there will always be tradeoffs – whether Freeman likes it or not.

A troublesome matter for businesses serving societal goals rather than marketplace needs is the complexity of catering to all stakeholders at once, and the subjectivity of what is meant as being ‘good’ or when ‘good’ does or doesn’t apply.

For instance, prior to the pandemic, regulators aimed to limit the use of single-use plastics, but such stipulations were suspended in response to COVID-19 safety concerns. Recycling centers shut down and plastic production ramped up. This was what was needed, and therefore good for society.

The Real Problem with Rating Systems

Divergent interests and incentives create push-pull effects in the market, and while it is important to be aware of the impact and opportunity costs involved, it is also important to let market mechanisms play out. Instead, however, firms are being coerced to abide by assessments and compliance measures ,and this will only create bottlenecks for production processes over time given that anything new or different will need to first be approved or verified. And Branson’s booming B Corp movement and Mackey’s Conscious Capitalism cohort are aiding in this process.

Adhering to the on-high expectations from verifiers such as the B-Team, who claim that our “economic model is broken” despite the great advancements we can see before our eyes, is not only bad for business but bad for progress.

Experimentation and diversification, according to Ludvig Von Mises, are the best combination for advancement, and new product offerings are a benefit to society in and of themselves when firms act ethically and serve the wants and needs of consumers. However, innovative pursuits will likely be supplanted by incremental improvements which adhere to the standards of external dictates and will garner endorsement from appraisal agencies.

Businesses shouldn’t need a stamp of approval from a certifying agency, especially since sales will signal when something of worth is being offered, and if profits decline organizations must work to understand why. Nevertheless, attaining the B Lab logo or being a partner in the conscious capitalism campaign has a strong appeal for those looking to gain social capital and appease industry elites and political pundits – and these initiatives are not only gaining traction, they are joining forces.

The Rebranding of Business and Centralized Control

Just recently, the Imperative 21 Network was launched to “RESET” our economic system, and both the B Team and Conscious Capitalism are listed as two of the primary stewards for this initiative.

The Network represents “more than 70,000 businesses, 20 million employees, $6.6 trillion in revenue, and $15 trillion in assets under management” and the goal is “to shift the cultural narrative about the role of business and finance in society”. And the shift is certainly underway given that in 2019, the Business Roundtable, made up of a group of 180 CEO’s of America’s largest companies, declared that business must aim to improve the status of all stakeholders and play a larger role in society.

With all this in mind, it is no wonder ESG took a stronghold in the investment community, and it is unnerving to see how easily the business world succumbed to power players.

But what is more worrisome is the fact that certifying agencies and assessment measures inevitably embolden regulators. Take for example the organic agricultural sect, whereas the certifying bodies were initially self-regulated and self-certified, having been established by the farmers themselves. However, as sales increased for organically labeled foods, so too did the number of certification bodies involved. The emergence of various organic labeling schemes confused what each label stood for and, over time, it became necessary to address the processes of certification and establish a more standardized and regulated system.

And the same will likely be true for ESG. Right now, there are a diversity of ESG frameworks with fees ranging from thousands of dollars to several million, and credibility concerns are on the rise and generating interest from monitoring agencies.

Given that ESG was formulated within the UN system to further the UN’s SDGs and hold PRI signatories accountable, it seems rather clear which ESG framework will win out in the end – the Global Reporting Initiative (GRI). The GRI is partnered with the UN and was founded with assistance from the UN Environment Programme and, coincidentally, it is currently the most widely used framework (implemented by 73% of the world’s top 250 firms).

Therefore, it seems likely that any standardized framework will be based on the UN’s postulates when all is said and done, and this will have all transpired in front of our eyes and by use of our own pocketbooks.

*****

This article was published by AIER, American Institute for Economic Research, and is reproduced with permission.

The ‘ESG’ Scam Rates Slave-Using Chinese Firms Higher Than Clean American Energy Producers

/in , , , , , /by
Estimated Reading Time: 5 minutes

A firm in China that uses slave labor has a better ESG score than an American firm that pays landowners who freely sell their mineral rights.

 

Expecting publicly traded companies to do more than simply return shareholder value — their fiduciary responsibility — is a fairly new development in Western capitalism. The idea that corporate leadership and shareholders should explicitly care about environmental, social, and corporate governance (known as ESG) issues beyond how they might affect the bottom line has been around for only about 30 years.

But now, ESG investing has become a big driver in steering capital to corporations deemed to be good stewards of subjective principles. By 2025, financial management firms that claim to invest with ESG principles are projected to account for $50 trillion of a total global value of $140.5 trillion — more than a third of managed investments.

But is ESG investing trustworthy? Does it really do what it claims to do?

MSCI is one of the world’s largest investment support services firms, with $2.1 billion in revenue. It offers an ESG rating service. I noticed that my Charles Schwab account recently started to display MSCI’s ESG ratings alongside that of the more traditional rating services — services focused on a company’s profitability.

Comparing U.S. and Chinese Companies’ Ratings

Curious, I looked into the rating of a firm I own some stock in Texas-based Brigham Minerals (NYSE: MNRL). Brigham looks for land that could produce oil and gas, and owns mineral and royalty interests in 7,909 oil wells and 688 natural gas wells in West Texas, New Mexico, Oklahoma, Colorado, Wyoming, and North Dakota. MSCI rates Brigham Minerals as a B, the sixth lowest of seven ratings that range from AAA to CCC, labeling it a “laggard” in the industry with an overall score of 2 out of 10.

I previously wrote about ESG investing’s blind spot for China three years ago in Fox Business, pointing out that investment firms playing in the ESG space were also bullish on China — a nation with terrible air and water pollution (the “E”), horrendous human rights abuses (the “S”), rampant corruption, opaque accounting standards, and rule of law only at the forbearance of the Chinese Communist Party (the “G”).

Not expecting the financial industry to have changed for the better, I looked up three China-based energy companies and compared them to Brigham Minerals. They were Xinyi Solar Holdings (OTC: XISHY), China Resources Gas Group (OTC: CGASY), and China Coal Energy Company (OTC: CCOZF). All three beat the American energy company in their overall rating.

Buying Into CCP-controlled Enterprises

Now, it’s important for investors to understand that you really can’t own shares in a Chinese corporation. When you buy shares in a corporation based in China, you’re really buying American Depositary Receipts (ADRs) that represent shares issued by companies in the People’s Republic of China. As such, your ownership rights are more theoretical than real and are subject to the whims of the Chinese Communist Party.

Further, many Chinese firms that have ADRs traded in the United States are themselves subsidiaries of state-owned enterprises — meaning that if you buy these ADRs, you are directly investing in an entity fully controlled by the Chinese Communist Party.

As an example, China Coal Energy is 58.36 percent owned by China National Coal Group, a state-owned enterprise. China Coal Energy owns 12 coal mines, 13 coal-processing plants, five coking plants, four coal mining equipment manufacturing plants, and two mine design institutes. They’re really into coal.

That makes sense, as coal is China’s largest source of energy — with the PRC having on the order of five times the size of the U.S. coal powerplant fleet in operation or in construction. MSCI rates China Coal Energy as “BB” — one step better than Brigham Minerals, with an environmental rating of 4.7 of 10 compared to Brigham’s 0.8, a social rating of 4.2 compared to Brigham’s 3.5, and a governance rating of 2.2 compared to 6.4 for the American firm. Overall, China Coal rates 3.1 out of 10 compared to 2 for Brigham.

China Resources Gas Group mostly invests in natural gas pipelines. It’s a subsidiary of China Resources Holdings Company, a state-owned company. The company got its start in Hong Kong as Liow and Company in 1938. Its purpose was to raise funds and purchase supplies for the People’s Liberation Army, then fighting the Nationalists in the Chinese Civil War — and, occasionally, the Japanese as they pressed their attacks into China.

By the 1960s, due to grain shortages caused by Maoist policies, the firm was used to import vast amounts of “capitalist grain” to stave off mass starvation. MSCI generously rates China Resources Gas as an “A” — the third-best of seven grades, with better grades than Brigham in both the environment, 7.7 to 0.8, and social, 7.6 to 3.5. Only in governance does China Resources Gas fall short, earning an “average” rating of 4.6 to Brigham’s 6.4. China Resources Gas nets an overall rating of 6.3 to Brigham’s 2.

Xinyi Solar Holdings should be problematic for MSCI — after all, China’s solar power industry, a global juggernaut, is a heavy user of materials produced by slave labor in Xinjiang, a Muslim-majority region formerly known as Turkestan where the Chinese communist government has been engaged in a grinding genocide. MSCI even has a corporate statement against “modern slavery” on its website, claiming that the firm “is committed to protecting human rights globally… Specifically, the Firm strongly opposes slavery and human trafficking and will not knowingly support or conduct business with any organization involved in such activities.”

This is at odds with MSCI’s ESG rating of Xinyi Solar — an “A” — with scores of 8.1 for environment (heavy metal pollution aside, apparently), 5.6 for social, and 2.6 for governance. Overall, Xinyi scores a 6.1 of 10 compared to 2 for the Texas firm.

That a firm in China that relies on slave labor for key portions of its supply chain has a better social score than an American firm that pays landowners who freely sell them their mineral rights betrays an upside-down ethic where freedom is slavery and ignorance is strength. Of course, that hasn’t stopped 174 institutional owners from investing in Xinyi Solar, among the largest being JP Morgan, Invesco, and Vanguard.

Counter to ESG Goals

This leads to one last, odd ESG story. Texas lawmakers, concerned about how banks and financial institutions aggressively implementing ESG investing rules were beginning to starve Texas’s energy industry of capital, passed a law in 2021 to address the problem. Senate Bill 13 prohibited Texas’s pension and investment funds (worth about $300 billion) from investing in “financial companies that boycott certain energy companies.”

But figuring out what companies those might be turned out to be a somewhat complicated process. So, the Texas state comptroller, charged with implementing the new law, turned to… MSCI. The problem was that MSCI is guilty of pushing ESG to the detriment of domestic energy produced in Texas, forcing Texas to modify its contract with MSCI to avoid violating the new law.

Ben M. “Bud” Brigham, founder and executive chairman of Brigham Minerals and other energy companies, has been an ESG skeptic for years. He tells me that “companies innovating in free markets strive to create value for their owners which benefit all the legitimate stakeholders. This is empirically validated in America, where we enjoy unprecedented levels of clean air and clean water compared to other major economies. In contrast, ESG investing — a relatively subjective exercise — often represents the influence of illegitimate stakeholders, and therefore ends up being irresponsible, destructive, and counter to its stated goals.”

So, here’s the bottom line from the self-righteous global elites: Chinese-government-owned coal, fine; Chinese slave-provisioned solar power, good; Chinese state-owned natural gas, better; American domestic natural gas and oil, terrible.

*****

This article was published by The Federalist and is reproduced with permission.