Is ESG A Valid Investment Metric?

I have been puzzling over ESG as an investment metric. ESG is Environment, Social, Governance, and purports to explain how a given corporation relates to its place in society. I can see the point but I have trouble estimating its worth in making investment decisions.

The dichotomy

There are two distinct viewing points.

  1. Corporations have a far wider place in society than previously recognized. They should align themselves with the ESG metric to estimate their contribution to stakeholders. Call that Value(s)
  2. Corporations exist to provide a service to society so as to create value for their shareholder/owners. Value.

The distinction between value and value(s) is persuasively explained in Mark Carney’s book, “Value(s)” but it includes an assumption that Values(s) should be the route of choice. While I appreciate there is a purpose in understanding all the ways businesses influence their world, I am not convinced that Value(s) is the optimal route.

I am concerned about the implementation. Do we need to change how we do it now? What would be a fair price to do so? Given that most economic decisions are based on selfish incentives, and what we know how to do, would it even work?

Implementation of the “Value” idea

Implementation has a near-zero cost to society. People use their own resources to begin, run, and expand a business. In so doing they must consider two things to be of primary importance?

  1. Does their offering provide enough value to the buyer to justify its price?
  2. Is the cost to produce the offering less than the customer’s price?

These are the organizing principles of every business and all business decisions are made within those limits.

If the business is able to meet those goals, it will prosper and grow. If not, it will fail and the resources it has been using ineffectively will end up being used by others.

Implementation is by trial and error to some extent, and with the idea that the right answer will evolve.

That’s how capitalism works. One strength it has is what economist Joseph Schumpeter called “creative destruction.”  The ability to remove obsolete or ineffective products and entities from participation in the marketplace. That destruction seems a good thing when viewed from afar.

The organizing principles that create value are the ones that will destroy the entity should it be unable to deliver.

Implementing the “Values” idea

Businesses begin in much the same way, but with the added cost to the people of subsidies, grants, and loans to support whatever the government has decided is a worthy purpose.

What will be the organizing principle?

I’ll leave you to assess that answer. Bear in mind it cannot necessarily be the one that demands the lowest cost to produce consistent with the quality required by the customer. All of the ESG components involve external costs and those costs must be recovered if the business is to survive.

Perhaps the idea is that corporate profits will be reduced enough to pay those costs. What will then destroy the failed entity? Mostly likely government subsidies and ball-outs in perpetuity. Can’t have those employee stakeholders without work.

Compare the two and what do you find?

    1. The Value(s) approach assumes that by involving and assessing a score based on stakeholders’ values rather than stockholders’ value, a great advantage to society as a whole will be assured.
    • Is there any objective evidence that supports the idea that value(s) for all is betterment for all? No!
    • Have bureaucrats typically been successful policy makers and sound implementers of their economic ideas? Again No.
    • Is there any reason that people will invest in this sort of business enterprise? No, once again.
    • Who will benefit from such a reorganization? The ones promoting it right?

2) The value approach disenfranchises some and excessively rewards others. That is objectively true. What is lost in the value(s) rhetoric are the reasons.

    • Entrepreneurs work more than almost any other group in society. 60-hour weeks are normal and 100-hour weeks are not uncommon.
    • Entrepreneurs accept more risk than others. If you work at a business, do you go bankrupt if you make a mistake?
    • Entrepreneurs spend time assessing what customers want and deciding if they can produce it for less than customer is willing to pay.
    • Entrepreneurs stop doing anything that cannot meet their organizing principles?
    • Who will benefit? The ones who work the hardest, the smartest, and who provide the greatest service to the customers. Entrepreneurs are not common.

What should we expect?

Thinking people will resist. The general rule is proposed by Spencer Johnson, “A change imposed, is a changed opposed” We could expect that the change will not be overtly imposed. No one suggests the “values” crowd is dumb or poorly led.

ESG is a way to move future investment towards things they favour and away from those they do not. How hard would it be to tinker with the metrics in ESG? Better than policy. Just make the guidelines useless. For instance, Exxon is in the S&P sustainability index but Tesla is not. There might be objective reasons. Who knows even what the ESP standards are? Opinion and fact can differ.

The ESG assessor career will become a real job. It may be a little more subjective than the CFA, Chartered Financial Analyst course of study, but in demand.

The WEF and Klaus Schwab are at the forefront and deservedly so. They are brilliant marketers and fundraisers. Do those skills transfer easily to running a world bureaucracy? Have they learned all there is to know from the failure of the European Union bureaucracy? Jordan Peterson recently asked an interesting question on Twitter: “Who the hell is Klaus Schwab anyway other than a conference organizer?

In the short run, maybe as long as 20 years, the elite will be enriched and the others will be impoverished, or at least their upward mobility will be limited. The USSR lasted 70 years and was an abject failure throughout its existence.

Facts and reason will disappear in favour of expert opinion.

The idea of trying many things and keeping only the successful will disappear in favour of command and control.

The thoughts to take away

Value(s) are luxury goods funded by Value.

There is no objective evidence you can have an emphasis on value(s) without diminishing value. Perhaps it is possible but so far there is no evidence. Who is accumulating that evidence and who is challenging it? What happens if “Value” falls precipitously?

The decision becomes can you achieve more “value(s)” with fewer resources? Alternatively, do you believe in something for nothing?

From what we can see from The World Economic Forum, a leader in the field, the development will be through the guidance of a global elite directorate composed of academic, government, and business leaders. Has central planning ever produced benefits for the masses?

What are the logistics and how is “value” allocated in the process? Essentially, “How is that supposed to happen?”

The idea of ESG is compelling only so long as you look at the perceived advantages.

How should you invest now? What parameters still have meaning? Your decisions will include more risk than you have been accustomed to.

Do you value prefer process or outcome?

It won’t be easy or conflict-free. Be ready.

As a personal goal, should you try to become one of the elites or one of the resistors?

Watch for the cue words – sustainability, stakeholders, value(s.)


I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.

Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: