Karen Parker Feld
In 2019, Jeff Egizi and I sought to understand the foundations of the Environmental-Social-Governance (ESG) movement that has gripped investors. In The Sine Qua Non of Sustainability we wrote about the sea change in investment priorities over the past decade, the self-serving nature of Wall Street’s “solutions” to the problem of corporate externalities, and what we believe are the critical elements of an effective socially-responsible investment strategy.
Distinguished NYU finance professor Aswath Damodaran has highlighted the many illusions and internal contradictions that attend the ESG bandwagon, which he calls the “The most oversold and overhyped concept in the history of business.” For example: the inconsistency of ratings among agencies that purport to describe fundamental elements of firms’ operations; the tendency of ratings to rise with the size of the business and the number of disclosure items (which is cause and which is effect?); the indistinguish-ability of (more expensive) ESG-weighted investment funds from traditional market benchmarks, and their similar correlations to various economic and market risk factors.
The wide variety of social priorities and measurement criteria suggests that these funds are trying to be everything to everyone. Moreover, by shifting accountability from shareholders to a nebulous group of “stakeholders,” companies effectively become accountable to no one.
In the end, we concluded that intelligent stewardship of the environment and society’s precious natural resources should be the central goal – the sine qua non, if you will – of a socially responsible investment strategy. Not only does our societies’ survival depend on intelligent and circumspect use of natural resources, a commitment to environmental sustainability is fully compatible with the principles of value investing.
Even in this narrower domain, one of the first things you notice when contemplating conservation, adaptation, and alternative energy strategies is the wishful thinking that is commonly associated with transformation goals. Few investors seem to appreciate the inevitable costs and tradeoffs, both financial and material, associated with the switch to lower-energy-density technologies. We cannot avoid relying on fossil fuels in order to build an alternative energy system, meaning that old and new energy sources are complementary in the short run (and maybe even the longer run). The “payback period” for many alternative systems, once the cost of production, delivery, and grid integration are properly accounted for, spans decades, not years.
In his blog Do The Math, Tom Murphy, a theoretical physicist at UCSD, provides extensive analysis of the challenges associated with alternative energy production, storage and distribution. It should be required reading for anyone who is serious about mitigating climate change and ending the staggering waste of our natural resources.
There is no free lunch when it comes to building a more sustainable energy future. We must be realistic about the time and costs involved in reaching our goals. Every dead-end road wastes an opportunity to move with deliberate speed toward a better world.
