top of page

Forget About ESG

Forget about 'ESG,' evangelists misappropriating the underlying concept to convert companies to 'do good,' critics relying on fallacious arguments to defeat it, and the deeply partisan politics around it.

Instead, imagine an asset manager considering investing in a specific sector from a purely rational perspective relying on hardcore corporate finance principles. Their honorable objective is to generate excess returns over a short, 12-month period.

The asset manager identified two publicly listed industry participants, Company A and Company B. Both are pure-play operators. They are equally sized with the same market share, revenues, and geographic mix. They also enjoy identical profitability and return on capital profiles. They have historically followed similar investment patterns in tangible and intangible assets, including R&D. Their financial targets (growth, operating margin, return on capital) for 2028 are the same in all material respects and are equally credible when considering management quality. Finally, they are similarly capitalized.

A and B trade at the same valuation multiple and have the same equity value. The asset manager marvels at the rare occurrence of perfect market efficiency: prices appropriately reflect all available information. Eugene Fama would be ecstatic. The asset manager can pick either A or B and accomplish their mission.

Within a short period, the same asset manager and the broader investor community gain access to additional, non-financial corporate information made readily available by financial market data providers.

* in tons/$ million revenues ** in MWh/$ million revenues

The implications for the asset manager's investment decision process start with a broader market assessment: will financial market participants consider the additional information in their evaluation of A and B? If they do, which KPIs will be regarded as most material to the company's future cash flow generation potential? Will the newly uncovered arbitrage opportunity favor Company A or B?

Given this new background, which company should the asset manager buy or short, considering the evolution of various world scenarios during the contemplated holding period? Naturally, the same questions would apply to a private equity firm seeking to make an investment with a 5-year holding period. Or to a corporate making an acquisition 'forever.'

All investors – asset managers, institutional investors, private equity firms, and corporates – may forget about 'ESG.' But prices will not forget to reflect all available information.

294 views0 comments

Recent Posts

See All

The Big Bad Wolf That Wasn't

Twelve months ago, 2022 was named ‘The Punch.’ The events of that year exposed the structural vulnerabilities of the prevailing global operating system in areas such as energy, food, and defence. What

Outside Insiders

Social sciences frequently delve into the dichotomy of insiders and outsiders when discussing individuals’ capacity to comprehend and authority to comment on groups they do not belong to, be it based

The Genius Case For Nature

The next few quarters are expected to be slow, economically speaking. As summarized in ‘The Normalization Mirage,’ inflation is abating at the expense of growth following a process anticipated months


bottom of page