Good riddance, 'ESG'

Woke is walking.

Larry Fink, CEO of investing giant BlackRock, said he’ll no longer be using the buzzphrase “ESG,” which stands for environmental, social, and governmental factors when evaluating companies to invest in. ESG investing gained some popularity in recent years as a set of non-financial metrics to help guide conscientious investors toward ethical companies and away from malfeasant ones.

Supporters argue that ESG investing, while fostering a clear conscience, also generates superior returns.

Yet like any do-gooder effort these days, ESG investing also produced a politicized backlash, mostly from conservatives protesting liberal overreach, or the “woke mind virus,” as Florida Gov. Ron DeSantis likes to say. Fink says the term and the concept of ESG have been “totally weaponized” and “misused by the far left and the far right.” Fink has been a leading proponent of ESG investing, so his about-face may mark the beginning of the end of this socially conscious trend.

I’m shedding no tears. ESG investing may have been worth a shot, but it has turned out to be counterproductive, outdated, and ineffective. For one thing, research suggests ESG investing might produce higher short-term returns only because the trendiness of it leads to more short-term demand for certain ESGish tickers. Over the long term, ESG returns are nothing special.

Markets should also do what markets are good at, which is maximizing profits and efficiency. Other institutions should regulate pollution rules, police corporate governance, enforce the rights of all minority groups, and pursue the other goals of ESG investing. There’s never a bright line delineating where the market ends and government begins, and the ESG movement has been a kind of trial-and-error effort to move those lines a little bit, which is fine. But the experiment failed. Here is how each leg of ESG investing flopped.

Environmental. The biggest push along this axis has been the movement to disinvest in fossil fuel companies. Be careful what you ask for. Guess who benefits when free-market economies start to move away from oil and natural gas: Vladimir Putin, Saudi Arabia, Iran, and other unsavory oil-producing nations that don’t care about ESG values. This played out in stark fashion last year when Putin’s Russia invaded Ukraine and energy prices soared, producing a windfall for Russia to use to finance its war. Here in the United States, enviro-president Joe Biden faced a huge political problem as gasoline prices skyrocketed to $5 per gallon. The ultimate irony was Biden, a green-energy acolyte, begged US drillers to produce more oil. Everybody forgot that most of the US and world economies still run on fossil fuels.

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The ESG mindset on energy is binary: Renewables are good and fossil fuels are bad — get rid of fossil fuels as fast as possible. This is completely disconnected from what’s happening in the world and even from the best-case scenario for green-energy adoption. The world will need a lot of oil and natural gas for decades, and gas is even a crucial “base load” fuel that will allow the faster adoption of renewables. Pressure to disinvest in companies that produce vital commodities we depend on today is foolish. The better approach is a steady transition from one to the other without jumping so fast you cause self-defeating shortages.

When ESG investing kicked off, governments weren’t doing much to combat climate change. Now they’re doing a lot. Biden has signed the most aggressive legislation in US history to incentivize green energy adoption — and the evidence so far is that it's drawing even more private-sector money into renewables than most people anticipated. There will be stumbles, but that’s a lot better than a minority of investors trying to accomplish this through market manipulation.

Social. Who sets the rules for what is socially acceptable behavior at publicly owned companies? This is obviously a minefield for CEOs, with the recent Bud Light fiasco showing that outreach to one group can enrage other subsets of customers. ESG investors want to favor companies demonstrating the most tolerance toward the widest group of people, which is laudable. Maybe just do not do it through your portfolio?

There are already laws against discrimination and other types of abuse. Corporations struggle with social policies because there’s a giant clash of cultures nationwide, whipped up by frothing politicians like DeSantis and Donald Trump and amplified on cable news and social media. There are plenty of activists to fight these battles. Doing so in the name of investing returns is kind of silly.

Governance. Aren’t investors supposed to take account of corporate governance as a matter of course, and not as some special side venture? Isn’t that why we have a whole elaborate set of reporting requirements governed by the Securities and Exchange Commission? What more do you need? Again, this is a bit of a guise meant to assure favored companies do the right thing, whatever the right thing is. If you doubt the effectiveness of plain-old corporate governance, watch what happens to a company’s stock when it discloses it has received a Wells Notice or files an 8-K report providing notice of some accounting irregularity.

The intent of ESG investing won’t go away, even if the phrase or the concept does. There are a lot of investors who want to feel good about the companies they invest in. Larry Fink and other smart money managers will find ways to serve them. If they could honor the cause without being so judgy, it would be a worthy evolution.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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