ESG: Ripe for Abuse

Exxon Mobil plant (WSJ photo)

If you have not been keeping up with the latest corporate trends, dear reader, you may not know the letters "ESG" (environmental, social, and governance). Proponents say that ESG measures the degree to which companies subscribe to the values of a significant sub-set of the investing public, i.e., those for whom environmental, social, and/or governance issues are important.

Critics argue that this is another attempt to bend corporations to the will of activists who have not achieved their objectives through the political and legal systems.

What are the details of ESG reporting? Investopedia: [bold added]

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?

Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show a high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?

With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods, and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don't use political contributions to obtain unduly favorable treatment and, of course, don't engage in illegal practices.

In the opinion of your humble blogger, ESG is ripe for confusion, if not abuse:
1) Who decides what the measurements are, and who measures them?
2) The three categories have only a tangential relationship: dividing the CEO and the Board Chairman into two separate positions (good governance) has little to do with water usage (environmental impact).
3) Once a business starts measuring the data, activists will never be satisfied, because, for example, carbon emissions and plastics usage can not be reduced to zero.
4) In the age of social media, companies will make themselves even more vulnerable to judgment-by-bullhorn. There is enough headline risk already.
5) ESG disclosures will be expensive, because it's unlikely that a business will have in-house expertise on all the topics. Small businesses will be especially affected.

Nevertheless, not paying attention to ESG makes it more likely that a company's stock price will suffer:

while companies that don’t disclose environmental and social data may not always lose investors, they are more often being passed over by new investors, in favor of firms with better disclosure practices, ESG investors say.

pressure on companies for nonfinancial disclosure is growing. A group of 88 investors with nearly $10 trillion in assets, including HSBC Global Asset Management and the Washington State Investment Board, sent standardized environmental disclosure forms—requesting information related to issues such as carbon dioxide emissions, use of fresh water and deforestation—to many of the world’s biggest companies in February and followed up with officials of companies that hadn’t responded by June. Another group, the Workforce Disclosure Initiative, a coalition of investors with more than $13 trillion in assets under management, sent a letter to 750 companies in July asking for more information on how they manage their staff and workers in supply chains; 90 companies have provided the requested information.

I'll believe that the ESG movement is little more than a front for anti-capitalists when the same reporting is demanded of government agencies, some of which affect our lives more than any single company.