ESG has become a ‘dangerous placebo’ – it’s time to shut it down

‘Environmental, Social, and Governance’ (ESG) is a marvellous concept, appallingly executed.

The fundamental problem with ESG is how markets actually operate. Even after decades in finance, I’m still amazed at just how inefficient markets can be, how distortions are often ignored, groupthink dominates strategies, and sheer laziness leads to all kinds of tomfoolery.

Markets are about the madness and behaviour of crowds. It’s very different to what I was taught back in the early 1980s when economists wittered on about ‘rational expectations’. I’ve learnt there is nothing particularly rational about the way market participants tend to think.

Several distortion themes have mainly dominated markets over the last few years. The first is monetary distortion, which has utterly dislocated the pricing mechanism of markets. The second is ESG–based investing, which has become like the Spanish Inquisition in its determination to root out and punish unbelievers and burn them as heretics.

ESG has become a particularly dangerous notion. Although I believe in the science of climate change, am probably the last Clause Four Socialist left working in the City and will only invest in companies that can show pristine corporate governance, I find ESG to be a very poorly constructed edifice. I’ve long believed many ESG proponents have been feathering their own nests.

I’m not the only person who sees it. This week we’ve seen an incredible post by Tariq Fancy, entitled the Secret Diary of a ‘Sustainable Investor’. He’s the former head of Sustainable Investing at Blackrock, which boss Larry Fink has committed to ESG goals. Fancy resigned when he figured out ESG was riddled with inconsistencies, dubious motivations and concluded it was ‘a dangerous placebo that harms the public interest’Fancy has called ESG ‘marketing hype’ and ‘a dishonest promise’. He has identified many issues, including that financial institutions have obvious motivations to push high-fee ESG products to raise profits, and the data underlying ESG theories is unclear and subjective.

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