Is ESG Ready to RIP?

October 30th, 2023

Aswath Damodaran, professor of finance at the Stern School of Business at NYU, presents a brilliant dissection of the many contradictions and pitfalls of ESG in The Financial Times.

Damodaran likens ESG advocates to 20^th century socialists whose response to every socialist failure was that their ideas had never been properly implemented. “The truth is that ESG scores today measure everything – consequently, they measure nothing.”

He gets to the core of the issue, the conflicting promises of ESG. “If an asset is less risky, it should have lower expected returns. Thus advocates who argue that improving ESG will make firms less risky are directly contradicting other claims that investors will earn higher returns if they invest in high ESG companies.”

Like a matador, Damodaran steps in for the killing blow. The “E” of ESG has done nothing for the environment. “Is it any surprise that after trillions of dollars invested in fighting climate change, we are just as dependent on fossil fuels now as we were a decade or two ago?”

About the “S,” “like pyromaniacs complaining about fires around them, ESG advocates, who chose to be arbiters of social good in a world divided on many issues, protest that ESG has been politicized.”

And “G” “replaces the original notion of corporate governance, where managers are accountable to shareholders, with one where managers are accountable to all stakeholders, effectively making them accountable to none of them.”

The only point Damodaran makes that I would disagree with is that ESG is dead and can rest in peace. Lawsuits by attorneys general and brave actions by state finance officers have the movement in retreat. But there is too much money to be made, too much self-dealing by consultants and proxy advisors, for the movement to simply stop. It is going underground and burrowing deep, with no little help from the Biden Administration and a heavily politicized SEC.