ESG - A ‘WokeJoke’ or What?
The stock market and the Bond Market, the world of money management and investing has been invaded by the Woke Folk. Individuals invest, directly or indirectly, via pension funds or mutual funds, and seek companies or bond offerings of quality enterprises who can earn money and when it comes to bonds, those that have the expectation of paying off the debt. Quality companies are growth or dividend paying and can be attractive. The strength of their balance sheet is important. Demand for products and services propels businesses to succeed. And when they borrow, the ability to repay is important. When we lend we want to be paid back. Historically interest rates for borrowers reflected their ability to repay. Rating agencies, such as Standard and Poors, rate bonds for quality, a scale that reflects highest to lower expectations of continuous repayment of obligations. AAA is the highest.
"For years now, the cult of ESG economic activists has been working overtime to infuse unwanted, woke ideology into the American economic system because they know their social policies wouldn’t pass the sniff test from voters," Florida Chief Financial Officer Jimmy Patronis said on July 27, 2022. "It’s anti-American, anti-freedom, a deliberate attempt to subvert our democracy and not in the best interest of Florida businesses (ant business), retirees, or investors."
The Woke crowd, a minority in my opinion, has been able to introduce, with adoption by the SEC (Securities and Exchange Commission) and Standard and Poors, an additional standard. Thus ESG. This rating is based on qualitative factors, not quantitative. An issuer’s ESG rating is determined by researching and documenting answers to a number of qualitative questions (or inputs) for each of the three pillars (E, S and G). There are hundreds of potential inputs, some subjective, some objective and some simply estimated.
What is ESG? E is for Environmental issues. S is for Social issues. And G is for Governance issues. This is where the Woke Folk are let loose to not only introduce and suggest factors to be considered, but also to influence investment management groups. The focus appears to favor environmentalists, diverse staffing and hiring practices, to include race, sex and sexual orientation, pay structures and work environments. The more diverse receive higher ratings. Those who provide more benefits to their employees receive higher ratings. The lower the carbon footprint, the higher the rating. High CEO pay may cause downgrades. You can start to paint your own picture. A company with high demand for its products with attractive profit margins is important, but now can, having a lower ESG rating, find fewer buyers, a lower price-earnings ratio, and higher rates on its debt securities. If deserving of a high standard on the ESG scale the capital markets are more attractive.
The term ESG was popularly used first in a 2004 report titled “Who Cares Wins.” There is an ESG Institute. They define ESG - Environmental, social, and corporate governance (ESG) is an approach to evaluating the extent to which a corporation works on behalf of social goals that go beyond the role of a corporation to maximize profits on behalf of the corporation's shareholders. Typically, the social goals advocated within an ESG perspective include working to achieve a certain set of environmental goals, as well as a set of goals having to do with supporting certain social movements, and a third set of goals having to do with whether the corporation is governed in a way that is consistent with the goals of the diversity, equity, and inclusion (DEI) movement. (Yes, there is such a movement.)
Joel Makeower, Chariman and co-founder of the Greenbiz Group, said this, “ESG ratings are first and foremost an independent opinion about the environmental, social and governance risks facing a company and its shareholders, not the risks to people and the planet. And the ratings can also have value as an information resource for capital.”
There is a S&P 500 ESG Index. Tesla was recently removed from the index; its ESG rating considered too poor. This arose from multiple deaths involving Tesla cars, racial discrimination concerns and questionable working conditions at manufacturing facilities. Tesla makes an environmentally favorable electric vehicle, but arbitrary concerns bounced them from the S&P ESG deck. In reaction, Musk tweeted that the move came, “Despite Tesla doing more for the environment than any company ever!” He also called ESG investing a “scam.” Oddly enough many energy, fossil fuel companies, are still rated favorably by ESG rating agencies.
The intent of credit ratings are to value those who access the capital markets. S&P explains that ratings are “an independent opinion of your organization's overall creditworthiness and financial strength.” So what value is added or subtracted when ESG is considered? Is this an attempt at valuing a real world impact being made by businesses, even when it impacts their bottom line? Are the financial rewards/costs to be ignored? The bottom line - it is about what businesses are doing about the environment and their communities. Are they good citizens, good managers, good employers, good to their people, et al and this now requires a rating.
Aniket Shah, managing director and global head of ESG at the investment banking firm Jefferies Group, said. "What ESG has done, and done it more well than poorly, is that it has socialized and educated the financial and business worlds on a bunch of topics that they weren't knowledgeable about before. And maybe it's because I am a part-time academic that I think that education is really powerful.” ‘Socialized and educated,’ part one, and a ‘bunch of topics,’ part two. ESG is making companies aware and investors of their role as a responsible provider, not just to the markets they serve, but to our water, our air, our dignity and our world. Does that need to be rated?
You be the judge, is that enough to justify businesses having large ESG departments engaged year around to complete and comply with the paperwork needed to provide those that rate the data requested/needed to provide their ESG quotient?
Right now the balance is more to the ‘woke’ left than wholly practical. Being a good citizen is just part of business and in my view does not need a cast of employees to find data, provide data, analyze data, more qualitative than quantitative, that can result in an evaluation by either a conservative or a liberal analytical team to yield a rating that can effect the cost of doing business and investors willingness to invest. Beware protestors too can be alerted of those for whom ‘cancel culture’ applies if the ESG rating is low.
After the Minnesota and Portland protests/riots many gave to BLM, including Bank of America, which did not make me happy, which many have called ‘white guilt.’ Did this help their ESG ratings? And now, looking at the real picture, are they more fools for being scammed? Much of the justification for the evidence, the data, that comprises the ESG rating is to make companies, the executives, appear more accepting, more embracing of a racial mix, intersectional hiring, and provide evidence of a work environment, product standards, and how they handle their waste materials as being responsible and compliant. A good company does all this without the need for ESG. In hiring best practices suggest employing those that meet the needs for the job at hand, creating a meritocracy, and not hiring to comply with standards. Look what that has done for our Federal Government.
This is just another way businesses and agencies are burdened with superfluous staff and costs than only aide in further inflation and the cost of goods and services to consumers. It is a WokeJoke.
Thoughts.
by
Thomas W. Balderston
Author and Blogger
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