MarketWatch reports that an S&P ‘ESG’ index has dumped electric car manufacturer Tesla from its ranks. In response, Tesla founder Musk tweeted his view that the ESG label is a “scam.” Musk is of course correct. ESG stands for Environmental, Social and Governance. It is a political ranking system posing as a credit rating system, which creates various “scores” based on a variety of fashionable political factors. ESG is designed to strangle disfavored industries from access to the capital markets. Musk put this succinctly in a follow-on Tweet:
Despite Tesla doing more for the environment than any company ever! pic.twitter.com/ImxrhnRepj
— Elon Musk (@elonmusk) May 18, 2022
The ESG ratings industry is rife with conflicts. Utah state treasurer recently wrote a letter to ratings agency S&P, described by energy policy expert Mike McKenna as “no doubt prefatory to eventual litigation… [and] signed by the governor, the lieutenant governor, the attorney general and the entire congressional delegation.” The letter took S&P to task for publishing ESG credit indicators as part of its credit ratings for states and state subdivisions and its “plans to publish ESG credit indicators to "augment’ its credit ratings”:
Whatever the branding campaign surrounding it, ESG is itself reckless. It causes the reduction of available finance to firms that provide essential goods and services. Denial of those goods and services is likely to prove perverse if little consideration is given to the adverse consequences and the means of mitigating them.
Even as the Securities and Exchange Commission is preparing to impose the mother of all ESG scams on public companies, evidence is mounting that ESG is utterly insincere, and that the lobby has created an ESG bubble, which bubble may be popping. Consider several recent warnings:
[W]ith pressure to invest into the “clean energy” asset class comes the risk that capital is misallocated, as investors prioritise urgent societal imperatives and optics over pure business nous and discipline. This [reflects an] approach of “demonstration investments” to back environmental causes… a new market doctrine that “everything renewable is great and everything fossil-fuel-related is awful.” — Dambisa Moyo, “Lack of investment rigour risks creating ESG bubble.”
Financial Times, October 19, 2021
I show that the performance of ESG investments is strongly driven by price-pressure arising from flows towards sustainable funds, causing high realized returns that do not reflect high expected returns…. Under the absence of flow-driven price pressure, the aggregate ESG industry would have strongly underperformed the market from 2016 to 2021. Furthermore, the positive alpha of a long-short ESG taste portfolio becomes significantly negative. — Philippe van der Beck, Philippe, Flow-Driven ESG Returns (September 23, 2021). Swiss Finance Institute Research Paper No. 21-71,
Musk might be thankful to have Tesla untethered from the ESG label. It seems a certainty that bad times lie ahead for “ESG” investments, with harmful knock-on effects elsewhere in the market. This will all be due in part to ESG swimming, quacking and doing other things like a scam. Whatever prompted Elon Musk to express his opinion, he will be proved right.
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