The marginal returns of ESG investing hurt us all

The first problem with ESG is the lack of firm, objective, and uniform standards, criteria and targets

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Ian MadsenThe adoption of environmental, social and governance (ESG) standards by institutional investors is ultimately a form of woke and green social credit scoring for corporations.

It is meant to cajole, if not compel, investible companies to adhere to rigid rules and criteria established by investors or outside entities, such as consultants, to satisfy so-called climate change and diversity and social equity targets. Never mind that these are controversial and disputed topics.

And it has all become a mess.

The first problem with ESG is the lack of firm, objective, and uniform standards, criteria and targets: there is no agreement among ESG proponents about how to rate firms on ESG standards. The E in ESG is essentially anti-fossil fuels.

Yet one firm may be rated highly anti-fossil fuels by one evaluator but disqualified or low-ranked by another. For example, Tesla, which makes electric vehicles (EVs) and has a solar energy division, would seem to be a candidate for a high E score, while ExxonMobil, a huge oil and gas producer, should have a low score. Nonetheless, Tesla’s E merits didn’t count for much for one rater, versus the supposedly higher G scores of the oil firm.

Nearly every firm working in China uses electricity generated by coal. Hence, they should have a low E score and not be investible by Western devotees of ESG standards. But they are still eligible.

Chinese companies producing or refining the minerals that go into solar panels, wind turbines and electric vehicle batteries are notoriously sloppy and dirty in their operations, producing air, water or soil contamination. Yet they are still eligible.

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Indeed, all firms in China are likely ineligible on social or governance grounds, as China is a brutal dictatorship that abuses its citizens, a land where the rule of law is arbitrary, subjective and selectively applied. That’s not to mention the genocide of minorities in China, suppression of dissent and oppression of religion.

Making the environmental criterion further suspect are the resources involved in making solar panels, wind turbines, EV electric motors and batteries. Solar panels require large amounts of purified silicon, rare metals and aluminum; wind turbines use synthetic materials for their enormous blades and rare metals for turbine power generators; electric motors and batteries require all those things.

Mining and refining silicon and rare elements require copious diesel fuel and electricity; the latter often derived from fossil fuels. The result: air pollution in addition to carbon dioxide emissions.

Synthetic materials are made from petrochemicals, and the transport and assembly of these components require more energy, little of which comes from renewable or low-CO2 emission sources.

Finally, the disposition of these materials after their useful life, which can be fewer than 30 years, creates more waste and potential contamination – these products can’t be cheaply disassembled and recycled.

Transporting all of these things around, and installing them, uses even more energy.

Another troubling fact from the ‘green transition’ movement that’s dangerous for the economy, businesses, national security, and ordinary individuals and households is the superficially ‘low’ cost of renewable energy touted by its advocates. Their ‘levelized cost’ doesn’t include the cost of the energy storage, typically pumped-hydro or batteries, the crucial safety buffer when there’s no sun or wind is inadequate. This deliberate evasion has been very damaging.

That dire weather situation memorably occurred in Germany when the North Sea wind arrays were insufficient to power the nation for weeks at a time. The overreliance on renewables has cost Germany its energy independence, as Russian natural gas became the buffer that wind and sun couldn’t provide. The result is dangerous Moscow dependence, and Russia is now at war with Ukraine. The blind adoption of alternative energy has also hurt California and Texas.

Ultimately, ESG social credit scoring delivers lower returns than the market, meaning less capital formation, economic growth-harming capital misallocation and smaller pension returns.

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