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Ending The Market Aristocracy

In Molière’s ‘The Bourgeois Gentleman’ (1670), a bourgeois, Monsieur Jourdain, is obsessed with acquiring the skills to ascend into the aristocracy. In one of the play’s famous scenes, he learns about the meaning of a new term, prose, from his philosophy master:

MONSIEUR JOURDAIN: Oh, really? So, when I say: ‘Nicole, bring me my slippers and fetch my nightcap,’ is that prose? MASTER: Most clearly. MONSIEUR JOURDAIN: Well, what do you know about that! These forty years now, I’ve been speaking in prose without knowing it, and I am the most obliged person in the world to you for telling me so!

Mr. Jourdain’s wonder is the expression of his naïve eagerness. Prose is, of course, nothing special.

In The end of ESG (2023), Alex Edmans, a Professor of Finance at the London Business School, makes a similar argument about ESG: Considering long-term factors when valuing a company isn’t ESG investing; it’s investing. […] None of [Warren Buffett, Bill Miller, and Peter Lynch] are ESG investors; they’re simply long-term-oriented investors.’1

ESG has been too often presented as a novelty deserving undivided attention. Ironically, this [has led] to ESG being prioritized at the expense of long-term value’ such as strategy or innovation, argues Mr. Edmans. Furthermore, the cover-your-rear approach to disclosure by corporates of dozens of ESG key performance indicators has only created confusion regarding what is material and what is not from a long-term value-creation point of view.2

Worse, ESG’s perceived reliance on higher moral standards has antagonized many and subjected it to politicization. In reality, ESG is not a debate on which you have to take a ‘side’ – it’s a subject, just like business is a subject; people’s stance on a subject should evolve with the evidence rather than being anchored on a side.’

Like prose, ESG should be nothing special. The best executive teams and investors have been ‘speaking ESG’ for as long as investing has existed. They did not need an acronym to support their approach to value creation.

But I believe the rest of the investor community does need a new corporate finance framework. ESG provides a tool empowering them to compete with the more advanced, patient, and resourceful investors. In other words, ESG fosters the intellectualization and democratization of long-term investing. Thus, I agree with Mr. Edmans: ‘ESG [will evolve] from a niche subfield into a mainstream practice.’ 3

In other words, ESG will help ‘bourgeois investors’ break into the circle of ‘market aristocrats.’

Relying on an infallible transmission mechanism, two things are happening. First, as common investors adopt a longer-term investment horizon, more and more ESG factors get priced into the market. Given fewer arbitrage opportunities, long-term investors are having to refine their skills in a bid to retain their privileges. Second, with investor demand getting more sophisticated, issuing firms must enhance the marketability of their market offering, as argued in ‘The Coffee Analogy.’

All ESG does is enable and, through competitive forces, compel all financial market participants to get smarter. It is about time.

1 See ‘Just Imagine…’ and ‘Capitalism Sapiens’ about ESG’s value creation potential (2022)

2 SeeJoin The Material Worldabout ESG materiality (2021)

3 See ‘The Vanishing of ESG about the end of ESG when fully integrated into corporate finance (2021)

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