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Disentangling (Anti-)ESG

Updated: Sep 29, 2023

In ‘The Coffee Analogy(2022), it was argued that consumers are entitled to the same wide variety of ESG investment choices as the range of coffee drinks offered by a specialty coffee house.


But if ‘ESG’ cannot be precisely defined, how could the alternative investment approach be framed? That is exactly the challenge for ‘anti-ESG’ advocates.


In The Liability Trap(2023), published in a Harvard Law School Forum, the authors determine that the so-called ‘boycott bills’ and ‘fiduciary duty bills’ promoted by certain U.S. States as part of an anti-ESG campaign would impose ‘irreconcilable legal requirements on such fiduciaries’ as they rely on ‘the unworkable distinction between ‘pecuniary’ and ‘non-pecuniary.’ Anti-ESG is as confusing as its nemesis.


Despite these challenges, Morningstar has identified five anti-ESG strategies In a recent report:

According to the same source, these funds have lost steam since 2022 and total only $2 billion of assets under management, which is a rounding error. The various anti-ESG bills at the State level have not fared much better: 85% of the 165 anti-ESG proposals were voted down.


And yet, an ESG debate must be encouraged. ESG cannot be considered 'good' by default and be blindly accepted as such. There is plenty of ‘bad,’ i.e., misguided ESG (e.g., focus on immaterial sustainability risk factors, unreasonable ESG objectives). If anti-ESG is anti-bad-ESG, it is as valuable as ESG, as much as bad ESG is closer to anti-ESG than ESG.


But what determines what is good or bad ESG? Let us attempt to put the town hall back in the middle of the village. The answer ought to be intrinsic value creation, consistent with the latest edition of Principles of Corporate Finance(Chapter 20, 2023).


Concretely, a sustainable strategy requires anticipating the eventual cost – in hard currency terms – of externalities such as carbon emissions, water usage, air pollution, or biodiversity depending upon a board’s apolitical assessment of future regulatory scenarios while implementing supportive social policies. That is what the ABC Group successfully did in Just Imagine(2022).


Companies must resist debate avoidance strategies through ‘greenhushing,‘ and, instead, build the skills to link sustainability to their equity story and cash flows. If investors can be persuaded to value long-term R&D investments with known costs but unknown benefits, the same can be achieved for ESG projects sharing similar characteristics.


As a final note, many firms seek to promote ethical values to support a cohesive corporate culture. I believe that such values should not be embraced in the name of sustainability as they politicize ESG.


Besides, unlike ESG, ethical values do not require any financial justification.

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