A new series in the Wall Street Journal by James Mackintosh argues that ESG investing is not effective, calling it a “craze.” We note that investing based on a view about “inevitable” retreat from fossil fuels, based on predictions about consumer and regulatory shifts, is not political, especially as Mackintosh concedes that investors base their decisions on “financially material” data and are not making financial trade-offs in estimating risk and return of ESG factors. He asserts that markets for oil and for capital have little impact on demand, but does not acknowledge or persuasively refute the legitimate reasons to believe otherwise.
ESG supporters can point to what look like successes: Their pressure has encouraged many companies to sell off dirty power plants, mines and, in the case of Anglo-Australian miner BHP, its oil business. It has even forced board changes at Exxon Mobil. Sadly, selling off assets or shares by itself does nothing to save the planet, because someone else bought them. Just as much oil and coal is dug up and burned as before, under different ownership. And there are plenty of people out there to buy the assets, because never before in history has there been so much private capital operating without the public reporting requirements brought by stock markets….
The problem is that less environmentally-minded investors buying those shares, oil wells or power plants are absolutely not going to shut them down unless they stop being profitable.
It might make sense for an investor or company to sell out of fossil fuels early if they think the retreat from coal and oil is inevitable—indeed, that was the pitch by the activist who took on Exxon—but that is simply to invest according to a political prediction, not a way to fight climate change.
Mackintosh’s conclusion in part one ignores the role that ESG investing is already playing on exactly the issues he concedes are legitimate
There is one way that ESG investing does, sort of, work. Shareholders can push companies to stop lobbying governments in favor of fossil fuels. Conceivably this might help push customers and governments to do the things that would really make a difference.
My big concern about ESG investing is that it distracts everyone from the work that really needs to be done. Rather than vainly try to direct the flow of money to the right causes, it is simpler and far more effective to tax or regulate the things we as a society agree are bad and subsidize the things we think are good. The wonder of capitalism is that the money will then flow by itself.
Mr. Mackintosh: What has thwarted economically-sound tax and regulation so far? Yes, it is the vast corporate sums paid to ensure subsidies, financial and regulatory, to allow fossil fuel companies to externalize their costs. Who can bell this cat, if elected officials cannot? It has to come from the market, and that is a core element of ESG.