ESG is Bullshit
It Smells Of Something Else
When all the elites and smart people get on board with something that you know in your gut is wrong, but you can’t figure out a cogent way to argue their points without offending everyone or looking like you don’t care about the same thing they care about, you are probably right.
That’s ESG investing.
If you don’t know, “ESG” is Environment, Social, Governance. It’s a way for the chattering class and elites to try and figure out new ways to dominate and control businesses they can’t control. It’s also a great way to make yourself look good at cocktail parties to show your concern about these issues.
When I was a delegate to the i7/G7 in Torino, Italy back in 2017, these issues came up. I asked one question: How can I use objective analysis to compare and contrast companies with regard to ESG? I can do it with GAAP accounting rules set forth by the AICPA. I can’t do anything with ESG and have to take the company’s word for it.
The Financial Times had an article on ESG this morning saying that companies cannot ignore it. If I were on the board of a company, I’d definitely tell them to ignore it.
Does it mean that as a CEO or an employee of a company you throw caution to the wind and you just do not even worry about ESG-or flaunt it by being less concerned about it?
No.
But, there are marginal costs to many ESG concepts just like there are marginal costs to most actions businesses take. You must recognize those costs. You must be able to articulate them so employees and shareholders and the market understand them.
For example, I saw a tweet by someone the other day that Americans have chemicals in their drinking water. Of course, American drinking water is probably something like 99.99% pure. What’s the marginal cost of getting to 100%? Does it matter to your health? What if it’s only 99.95% pure? Does it matter and what’s the cost to move the needle?
Once you look at it that way the conversation changes.
We are being made to feel guilty. It’s intentional because we don’t want to appear to the outside world as uncaring.
The truth is, if a business solves a problem and customers are willing to give up something of value to purchase that solution, it’s ESG.
A number of years ago, I was lecturing an entrepreneurial class at my undergraduate alma mater, the University of Illinois. The Gies College of Business is full of incredibly intelligent students. If you aren’t recruiting there as a company, you are missing out. A student asked about ESG and social investing.
Instead of answering the question, I asked the class a question.
Is an oil company an ESG company? Is it a “social good” investment?
After all, oil companies pollute. They have mishaps that cause real environmental damage. You’ve seen the photos but here is one just to refresh your memory.
They are horrible!
However, remember the elasticity of demand for oil is pretty steep. Substitutes are not easy to get. You will pay almost any price to get it. At higher prices, you will change your behavior to use less of it. That’s why these idiots that get on television and say higher gas prices will be good for climate change don’t really understand.
If the oil company didn’t drill and explore for oil, refine it, deliver it to a central station where you put it in your car, the entire world couldn’t function.
Our streets are cleaner because of gasoline-powered autos. Otherwise, they’d be dusty and dirty and full of manure. You probably couldn’t get to work without gas. Even if you use public transport, you are using the oil industry in some way. Even grease lubricates a lot of the gears on electric trains. Your building or home might not have heat and you’d have a lot less food to eat.
The student that asked the question didn’t like my question. She walked out of the class. She was more interested in social justice and fairness than she was in learning about business or thinking objectively.
Is an oil company ESG?
Of course they care and understand the costs. They use accrual accounting and allow each year for the unlikely but not impossible thought of a disaster. That's also called insurance. The left wanted Exxon to go bankrupt after Exxon Valdez. They didn't, because they had used accrual accounting with wise consultation with actuarialists. There is a discipline called "Probabilistic Risk Assessment." I know it from the nuclear industry, but I suspect it's used in other industries. It's surprisingly accurate. Given its results, one could have expected something like TMI, Chernobyl, and Fukushima. The discipline is depressingly accurate. I'd be surprised if the oil and gas industry industries hadn't adopted it, although I have no knowledge at all that they have.
This was a great article. One thing you didn't mention is that Western companies -- Chevron, ExxonMobil, Total, BP, etc. -- clean up their messes after they've made them and generally try not to screw up the environment. The Exxon Valdez shipwreck was terrible for the environment, but it was an accident. The company considered it a disaster. It was not Exxon's typical way of doing business.
I'm an electrical engineer and have worked on a few gas and oil projects in the field. Chevron is very particular about safety and environmental issues, no matter what country they're working in. I worked on a gas project for Pemex (the national Mexican oil and gas company) once. We were just outside Ciudad del Carmen, a city at the very bottom of the Gulf of Mexico. We were at a natural gas processing plant. Natural gas out of the ground has hydrogen sulfide (H2S) and vaporized "tars" in it. It's called "sour gas." The H2S and tars are removed early in the process, and it's then called "sweet gas." We had started work early one day and noticed smoke from somewhere over the trees. I had to go on the roof later in the morning and saw where it was coming from. There was a huge field, massive, where these formerly vaporized tars, once extracted and condensed, were just dumped and occasionally burned. The field was filling up, so they had lit some fires before dawn to burn off the tars. When the Pemex guys explained to me what I was seeing, I was dumbstruck. This was just run-of-the-mill activity for them. They just shrugged their shoulders at what the poor people downwind of those fires might be breathing in.
The Western companies like Chevron and the other companies from civilized countries bring an element of respect for the environment, worker safety, and the health and safety of the public totally lacking from the likes of the Mexican and Russian state firms. Investing in Western oil and gas companies is ESG of the highest order, even though it's not what the lefties want to hear.