Here is the Cambridge Dictionary definition of ESG: “A way of judging a company by things other than its financial performance, for example its policies relating to the environment and how happy its employees are.”
Can you spot the problem here? There are almost as many links in the definition as unlinked words, reflecting the wonderfully woolly world of ESG: nobody really knows what it stands for, other than an aspiration for a warm glow of doing well by doing good, like Tom Lehrer’s Old Dope Pedlar.
ESG – Environmental, Social and Governance – sounds no more than good behaviour, or at least the avoidance of obviously bad behaviour, in the corporate world. So reasonable does it sound that nearly all big institutions pay lip service, and quite a few have changed the way they work to accommodate what looked like a cost-free option.
The biggest convert of all was Larry Fink, whose Blackrock sits atop $9 trillion of assets, much of it in shareholdings in the world’s largest companies. So significant are these holdings that Mr Fink and his executives can dictate to the boards of almost all listed companies, because they have the votes that go with the holdings.
In May 2021, Blackrock over-ruled the wishes of the Exxon directors. It voted nominees for a tiny green-leaning group called Engine No1 onto the Exxon board, marking the seemingly inexorable progress towards an ESG world. Since then, nothing has quite worked out as expected. Exxon has doubled down on oil by buying an explorer, Pioneer Natural Resources; the Engine nominees were endorsed by the board to stay on at the 2022 meeting; and Larry Fink seems to have undergone an ESGectomy.
Gone from his 2023 annual letter to investors is the motherhood-and-apple-pie homily about the new caring, sharing world of ESG. It’s all rather more hard-edged now. Several American states have criticised, or even ditched, Blackrock funds, and the realities of capitalism are re-asserting themselves. When money costs almost nothing to borrow, ESG was a nice-to-have. Now it costs, saving the pennies starts to matter, and it looks like another unnecessary overhead. Blackrock is discovering those costs first hand, as billions of dollars have flowed out of its funds.
This is how capitalism is supposed to work. Companies should obey the rules set by the politicians, even when those rules amount to trickling a little more sand into the wealth-generating machinery. If their directors think they will make higher returns with more inclusion, employee rights, support for good causes or anything that makes them feel better, then so be it. The longer-term threat to the capitalist model will come not from failing to be goodie-goodie corporate citizens, but from the concentration of voting power into the hands of a tiny number of gigantic investors like Blackrock – but that’s a story for another day.
A Long Time In Finance is also a podcast. Get it at Spotify or Apple apps.
Write to us with your comments to be considered for publication at letters@reaction.life
