Over the last 10 years ESG — Environment, Social and Governance — has taken the financial world by storm. Sometimes dubbed “woke capitalism”, it favours morals over short-term financial self-interest. It has resulted in the rush of capital into stocks like Tesla’s, helping turn Elon Musk into into the world’s richest man.
But what ESG giveth it can also taketh away. Since achieving a valuation of $1.2tn in just over a year, the value of Tesla has fallen to $350bn, famously making Elon Musk the first man to lose $200bn.
The irony is, this has happened just as Elon Musk himself was deploying a similar playbook to force social change he believes in, notably free speech, at Twitter.
The situation has put activists and divestors at loggerheads.
Remember, ESG investing influences asset and commodity prices by enforcing what is known in economics as a buyer’s strike on assets that fail to meet certain standards they hold dear.
The theory goes that if investors refuse to fund industries that score poorly on environmental, social and governance factors, these companies will be seriously disadvantaged relative to those that score highly. Thus they will disappear from the market more quickly than they might otherwise.
The threat of divestment is a key weapon in the fight to force corporations to be more ESG-compliant. But it doesn’t work unless the investor is already a significant holder of the underlying stock. If an investor divests, they lose that power. This can be a problem if a non-ESG stock is capable of self-financing itself due to the scale of organic demand for its product (take the illicit drug industry as the most extreme example of that).
That’s why another pillar of ESG investing is buying the stock of low ESG-scored companies to influence change at the board level. This is exactly what Elon Musk did when he acquired Twitter to force through operating changes to enhance free speech on the platform.
Isn’t it strange then that the move has been so highly criticised within woke circles? Could the contempt be down to a delayed recognition that there’s nothing stopping other investors and funds from emulating ESG tactics to take down ESG?
When non-ESG companies deploy ESG tactics
A good example of this is the state of Florida pulling its capital from asset manager Blackrock in December because “using our cash to fund BlackRock‘s social-engineering project isn’t something Florida ever signed up for”.
What all this reveals, of course, is that whenever core profitability is put on the back burner in favour of a higher mission, everything becomes a function of a popularity game, and thus also of PR and propaganda.
If that’s true, ESG’s biggest secret may turn out to be that it has far more in common with unsustainable crypto investing trends than long-term sustainable investment. Both investing manias depend on the continued conversion of ever greater sums of people to justify its investment case in the short-term. If the conversion is broad enough, the argument goes, short-term non-profitability can be overlooked because capital gains will be so great that investors will not be able to ignore them.
The problem is, from crypto’s Hodl to ESG’s buyer’s strike, these virtuous circles can only be maintained for as long as the collective remains convinced of the vision. Game theoretically, that can only be guaranteed for as long as the rewards from defecting from the bloc don’t outweigh staying in it — something that has not been the case over 2022 when fossil fuel companies outperformed most other sectors.
In a free market, however, it was only a matter of time before ESG gains would be subjected to countervailing market forces. Furthermore, history supports the notion that those who attempt to manipulate the market eventually reap what they sow.
In the case of ESG, the pressure to encourage investors to go against their own self-interest may have inadvertently created Elon Musk — an opportunist who has happily exploited the ESG movement to crown himself the world’s richest man. He is now turning the tables on the ESG world, however, by using that wealth to pursue his own “effective altruism” agenda. This, to the surprise of ESG investors, has turned out to be more pro “free market” and “free speech” than they originally appreciated.
ESG’s only viable response, in that case, may be doing the one thing it knows best: pulling funding from those it considers heretical to its mission so as to shut them down.
In fact, given Tesla’s massive stock slump in recent weeks, chances are, it already has.
What ESG investors may be missing, however, is the risk that Tesla and Twitter may be approaching ESG escape velocity in their own right. If either become properly profitable on their own back, neither divestment nor activism will be able to hold them or the missions of their majority owners back.
One Response