Below is a direct excerpt from Marty’s Bent Issue # 1077: “More Unsolicited Thoughts On ESG”. Sign up for the newsletter here.
I know, I know, I know Some of you might think that Crazy Uncle Marty’s anti-ESG shit is getting a little nauseating. However, I can’t control myself, as you should have realized by now. If I think there is something good on the subject, I will do it. And that’s what I’m here for today.
The above snippet is from a blog posted yesterday by Aswath Damodaran, a professor of finance at NYU Stern School of Business, that builds on a post he posted last September that began the ESG movement in capital allocation and furthermore to analyze whether it is a productive framework to conduct business and life. I strongly recommend that you take the time to read both parts because Aswath does an incredible job of breaking down the thesis behind the investment strategy, how it is being implemented in the real world, how it is not achieving its stated goals, why it is theirs Goals can never achieve set goals and a better framework for the “doing good” approach.
To summarize Aswath’s core argument; ESG doesn’t work because it ignores the existence of free will and uses a rigid mathematical function to reduce individuals and individual processes to uniform inputs that an ESG rating spits out. At its core, this type of rating / rating system cannot work because, in turn, it ignores the existence of free will and the subjectivity of “goodness” in the eyes of two different individuals. It is literally impossible to agree on a rating system that people can agree on. And since it does, any rating system that is put on the market will inherently carry the bias of those who construct it; Governments looking to gain more power over their subjects, and corporations looking to take advantage of regulatory trenches.
In addition, these investment strategies do not generate a desirable return profile when applied. So this movement is crowding out smaller players by increasing the cost of compliance and bringing poor returns for investors. A loss for most economic actors.
Well, if it does, why are so many people pushing it? Well, as Professor Damodaran so eloquently describes in his latest post on the subject; because most people do not want to take personal responsibility and extreme responsibility for their impact on the world. Many are so lazy that they prefer the government, capital allocators, and corporations to make these decisions on their behalf and give them an “ESG-certified” label to point to and say, “See, I do My part “!” Totally euphemistic is the fact that when this personal responsibility is turned over to bureaucrats, bureaucrats will do what bureaucrats do – whether they are political or corporate bureaucrats – manipulate the system in their favor and make everyone else worse off.
Politicians will try to gain more control and some companies will try to use it to create an artificial moat around their companies to artificially reduce competition. Which leads to another interesting line of discussion on the overarching ESG issue; Is that a form of fascism? I think you might very well argue that yes, yes, it is. And nothing made this clearer to me than a clip floating around on Twitter earlier this week in which Dave Smith enlightened another panelist about how Mussolini defined fascism.
“He defined it as a merger between the company and the state.”
While Dave may have articulated this to make it clear how vaccine mandates can be viewed as fascist, I think we can apply this to what is happening across the ESG movement as well. Via the instruction of the UN (a group of coordinated countries – the state) and the arbitrarily set “climate change targets” for the world population, corporations and capital allocators begin to control the means of production and select winners and losers an ESG rating system based on these arbitrary and subjective worldviews. Favoring some forms of energy and board structure over others, while the compromises that are not taken into account are not open. A good example of this is that wind and sun are preferred as energy sources because they are “green” when they use immense amounts of hydrocarbons and slave labor at the front and rear ends of their life cycle.
By creating arbitrary and rigid guidelines within which entrepreneurs must operate, the state and the corporations that can best benefit from these arbitrary guidelines dictate the means of production in a subversive manner. There is no overt physical confiscation of the means of production. Instead, the means of production are slowly but surely pushed in a certain direction until the desired level of control is in the hands of the state and its corporations.
As a Bitcoin miner, this topic has become very clear to me. In a healthy world, Bitcoin mining would be seen as a massive boon to conservation. For the first time in human history, we have a mechanism by which we can profitably monetize previously wasted and stranded energy resources. The network’s natural incentives force miners to keep their electricity bills as low as possible, and the best way to do this is to find wasted and stranded sources of energy that no one else wants to use. Bitcoin miners will show up in the middle of nowhere to harness energy that has literally been set on fire without creating any positive economic value. Make the world more energy efficient.
Not only that, but the miners who use this previously wasted energy are doing so to profitably enable and secure the best monetary system humanity has ever come into contact with. A money system that ends the mispricing of opportunity costs induced by the ability to print money out of nowhere. As Steve Barbour said in a conversation we took part in this afternoon, it punishes misallocation of capital, which leads to less unnecessary consumption. When governments and central banks print money out of nowhere to bail out companies that have misallocated capital and resources so misallocated that they are in danger of doing their business, they are maintaining this misallocation of capital and resources that can be claimed that they are a network is negative for the environment and society as a whole.
I’m sorry for the gossip, freaks. I just had to get rid of these thoughts after reading Aswath’s blog last night and participating in a conversation on the subject this afternoon. I’ll leave you with the actionable advice from Aswath’s blog post, which I think is a much better place for individuals, companies, and investment professionals to approach the concept of “doing the good thing in the world”. It should be based on your personal values and not a top-down dictation defined by a very narrow set of values.