Woke and ESG are Dead! Long Live ESGG!

ESG is getting a bad press these days, blamed for energy insecurity and much else wrong with the allocation of capital. It needs to be refined: ESG version 2.1 will be critical for addressing the massive threats arising from social injustice and income inequality.

Blain’s Morning Porridge, 12th May 2022: Woke and ESG are Dead! Long Live ESGG!

“Everything you see exists together in a delicate balance..”

This Morning – ESG is getting a bad press these days, blamed for energy insecurity and much else wrong with the allocation of capital. It needs to be refined: ESG version 2.1 will be critical for addressing the massive threats arising from social injustice and income inequality.

When my kids were small we must have watched the original Lion King together about a billion times. As Hamlets go, it’s pretty good. The opening scene stood out for me, setting the tone.. Scar, the hero’s evil uncle (played by Jeremy Irons), is toying with a mouse he’s about to eat… “Life’s not fair, is it? You see I, I shall never be king. And you shall never see the light of another day”, before he’s interrupted by a bird played by Mr Bean and the mouse escapes. “Oh, Zazu, you spoiled my lunch…” (Seriously, I did not have to Google that scene, it’s so imprinted on my brain…)

Life is not fair. That’s a fact. (But, the next time your younger kids or grandkids ask about the environment, the Circle of Life isn’t a bad place to start. Donald Trump hates the film as a slick piece of environmentalist propaganda…)

The global stock market was worth $55 trillion in 2010, and rose to nearly $97 trillion in 2021. Fantastic….! Raging bull markets, and financiers everywhere hi-fiving themselves on their cleverness… and cheering the size of their massive bonuses.

Yet, people, the consumers, who actually drive every single economic transaction on the planet, are struggling and are about to struggle more as the cost-of-living crisis – which is in part due to the inflationary pressures seeded by central bank monetary experimentation during the last decade – starts to bite. All that wealth never trickled down. That’s not politics… that’s fact. The comfortable middle classes are about to become pinched.

The brutal reality is Income Inequality has surged over the last decade of market boomtimes. These soaring stock markets and rents made the rich obscenely richer. The poor, the consumers that drive growth, struggled. It’s going to get worse as they pay the flip side of inequality in terms of stagflation, inflation, rising anxiety, declining health, income and job insecurity, impossible choices between eat or heat, and to cap it all, we’ve still got the coming crisis of global warming about to boil us all alive..

As the uber-wealthy order the last few tins of caviar, history tells us one thing.. when the poor get hungry, don’t be surprised if they eat the rich instead. At the very least they will trigger riots, revolution and strife.

How did life get this unfair?

As an optimistic pessimist I tend to believe most people are programmed to be basically good – trying to do the right thing for all the right reasons. However, psychopathic sociopaths walk among us – folk who not only have a limited conscience, but limited empathy or remorse for their actions. I suspect a surprisingly high number of them end up as successful entrepreneurs and financiers. It suits their goals to stir up narratives about trickle-down, and the evil of taxing the rich. They think success is measured by the number of billions in their bank balances and disregard the straight-to-hell deficit on their moral standing.

(Why does anyone need so much money? Even my wife and kids could not spend a billion over several lifetimes.)

Addressing income inequality is a matter for democracy and government.

We’ve got an entire investment industry now wedded to the idea of Environmental, Social and Governance (ESG) based investment principals – promising to invest OUR money to make things better, fairer and permanent/sustainable. As I’ve said so many times.. ESG is a fantastic idea, acknowledging and directing investment towards building a better society by addressing everything good companies and investors should do to build a secure and safe long-term tomorrow. What’s not to like?

Yep… ESG absolutely works for me. Problem is, it hasn’t worked in markets… Yet.

The problem is transition and distortion.

You can’t rebuild the workings, plumbing and structure of the global economy overnight. Its needs to happen in a planned sensible manner – a lesson we are learning in Spades today. The current Energy crisis is largely due to underinvestment and underplanning of future energy needs and security…. Which was definitely exacerbated by the refusal of ESG investors to finance anything with even a whiff of fossil fuel or carbon dioxide around it.

I know this first hand. I tried to explain you can’t build windfarms, solar farms or nuclear power without steel and without metallurgical coal you can’t make steel. Nope.. Even the pension fund for over 300,000 former UK coal miners refused to invest in it because it was “too difficult” and they were “ESG compliant”. I am also looking at how to use oil to create long-term growth and jobs in EM nations – and not using it for fuel!

There is also distortion, the way in which some firms are greenwashing and distorting the narrative to improve their returns by pretending to be ESG when all they are doing is trying to ramp profits. I might cite lithium batteries as one such distortion… the environmental damage from mining a recycling may ultimately cost far more than EVs ever cut carbon emissions.

But the mood is changing. ESG is evolving and becoming more functional, acknowledging it has to adapt, we can’t just stop the global economy, and we need growth to create jobs. Maybe ESG should become ESGG – Environment, Social, Governance and Growth?

I am absolutely convinced long-term we will build a successful, clean and very successful future economy based on clean power and energy sources. Thomas Malthus will, once again, be proved wrong – the world can and will cope with climate change, a rising population and we find a new equilibrium where we will all end up better off. But it won’t be easy getting there..

There are always going to be throwbacks to earlier times.. looking to exploit the opportunity the rising tide of disappointment with ESG and investment wokery has created. And speaking of sociopaths…

Earlier this week there was a Torygraph article about some random chap called Vivek Ramaswamy launching a new “anti-woke” fund called Strive and his new, no-doubt trade-marked, “excellence capitalism” philosophy to investment management. He’s going to take on the ideological cartel of Blackrock and Vanguard and remind fund managers and companies of their fiduciary duty to make money – rather than champion political causes.

What a curious modern age we live in. Even saying something is a “bit woke” is now likely to get you a formal HR warning as it’s apparently a microaggression against anyone who has a slightly different belief set to your own.

I looked at the guy’s photo. To prove I’m as unwoke as the next person, he looks a throwback to an earlier age of capitalism. He channels the traditional Gordon Gecko “greed-is-good” meme – smart suit, big hair, mansplaining his I’m-smarter-than-you get rich quick scheme, bequiffed with luxuriant curly black hair and the added advantage of being Indian so no one can accuse him of being a greedy white guy. It will appeal to make disgruntled older folk – you can’t fault Ramaswamy; he’s identified a market and is targeting them with a product their narrative will favour: blame ESG for everything and give you money to me…

I would not trust the geezer as far as I could chuck him. Despite making a “fortune” investing in pharmaceutical companies he’s only raised $20 mm for his new anti-woke fund, even though it’s backed by Bill Ackman (ouch, nasty hit on Netflix) and Peter Theil.

His message – tell companies to do what they do and do it “excellently” is hardly new.

He’s also late to the party. Blackrock already heard the message and is scaling back on its environmental crusade. Back in 2020 Larry Fink, CEO of Blackrock made clear to market’s Blackrock’s support for ESG. He displayed a clear sense of what the wider population is thinking about economic growth and prosperity, identifying the need to reshape finance and allocate capital to address climate change… but at no point did he say shut down the global economy.

Blackrock are anything but stupid. You don’t become the largest investor on the planet just by cutting fees to make themselves the cheapest to deliver. They also understand their market – the concerns of its savers. And, critically, they understand the reality – the planet is  in trouble. We need to improve the Environment, we need to address Climate Change, we need to Decarbonise, just as we need to improve justice, equality and social outcomes.. And we can only do these things by being realistic, and acknowledge you can’t change the world overnight.

Now Blackrock is pulling back from supporting environmental pressure they consider to extreme, too prescriptive or entail too much micromanaging.. (check it out on FT.)

The bottom line is the world needs pragmatism and common sense to solve not just climate change, but social injustice and wealth equality. I reckon its more likely we’ll see Fink and Blackrock lead solutions than chancers like Ramaswamy.

No time for Five things this morning…

Out of time and back to the day job…

Bill Blain

Strategist – Shard Capital

4 Comments

  1. Excellent – the two factors that explain almost everything now are wealth inequality and the formation of the China & US trade blocks.
    You nailed the first today. Wokeness is a deception much like QE and arguments against tax rates.
    Achieving equality of minorities at Oxbridge or the BBC is distracting from the key issue – helping the 80% of minorities and 45% of whites who are in the bottom half.

  2. ESG is a great idea with lousy execution. My 25 year old daughter is beautifully woke. Her passion and energy for making the world is a better place makes me proud. Her ability to identify and execute a plan for achieving this goals is sorely lacking.

    I believe the vast majority of people want a world free from the pollutions caused by fossil fuels. Strangely, I have never see a comprehensive plan on how to get there. Politicians and business leaders attend conferences (delivered by their private jets) to make admirable pronouncements with lofty goals.

    Until the leading industrial nations deliver a realistic plan, it’s all for show.

  3. From Press: A “bubble” could form in environmental, social and governance funds as some asset managers are not seriously committed to sustainability, according to the chief sustainability officer of Abrdn.

    Amanda Young, who was speaking yesterday at the FundForum conference in Monaco, says greenwashing in the funds industry is “a massive risk, largely because sustainability has become such a hot topic”.

    Ms Young says the popularity of sustainable investing means “there are people who may not necessarily have their hearts in sustainability driving revenues and flows”.

    “I am personally worried about a bubble,” she says.

  4. The main cause of underinvestment in the energy industry was low prices not ESG. ESG hasn’t worked because it has become “securitized” and “financialized” (i.e. Wall Street has turned it into something to buy and sell which of course means it doesn’t care for the value of ESG, just the price of ESG).

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