ESG is collapsing under the weight of its own contradictions

Environmental, social, and governance (ESG) is a set of principles that are increasingly being applied to the activities of publicly traded companies in the western world. There are undoubtedly different criteria for ESG, but I will use the environment criteria from a seminar that I recently took on the topic. The criteria were renewable fuels, greenhouse gas emissions, energy efficiency, climate risk, water management, recycling processes, and emergency preparedness. Keep in mind that outside groups and consultants evaluate companies regarding their adherence to ESG criteria. I was astonished to see that “compliance with the organization’s environmental licence” and “biodiversity conservation” were not on this list. Regarding environmental licensing, every industrial enterprise operates under a mandatory environmental licence that specifies the terms and conditions under which the enterprise must function. The common dogma, aided and abetted by proponents of ESG, is that companies are allowed to “pollute” with no controls, which is false. The terms and conditions of an environmental licence usually relate to water pollution control, air emissions quality, reclamation, site remediation, and, in the case of forestry, harvesting practise and reforestation. (Full disclosure: in a previous life I managed the environmental licence for a paper company.) Regarding biodiversity conservation, many environmental licences specify that a company must compensate for any deleterious changes to the environment. For example, oilsands operators, at great expense, must reclaim or create lakes, wetlands, grasslands, and forests to replace those that have been lost due to mining operations. These ESG criteria assume that renewable fuels are an automatic good. Tell that to the rural residents of the eastern United States, where thousands of acres of forest are converted daily to wood pellets to be exported to fire Europe’s power plants. This forest destruction was neatly illustrated by Michael Moore’s (no friend to us conservatives) blockbuster and honest film, Planet of the Humans, of the hazards of the forest loss due to wood pellet manufacturing, in the United States. In a 2018 report, the Rachel Carson Council calculated that just one company clearcut 50 acres per day or 18,000 acres per year to produce wood pellets for export. Palm oil is another source of renewable fuels. But the production of palm oil from palm trees necessitates the conversion of tropical rainforests to palm oil plantations. It has been estimated that, since 2000, 9.79 million hectares—or 11 per cent of Indonesia’s multi-species rainforests—have been converted to monoculture palm oil plantations. Regarding the social and governance side of ESG, most of the criteria are already covered by existing laws and policies as they relate to health and safety, working conditions, and others. However, how can you have outside groups comment on a company’s internal policies such as “employee benefits,” which are negotiated by the employees and the employer? When I searched for the “formula” to evaluate a company’s commitment to ESG, it became apparent that there are no consistent standards that are applied across the board. And some ESG evaluations result in preposterous conclusions. The tobacco industry is a perfect example. In an article in the Washington Free Beacon entitled, “How Tobacco Companies are Crushing ESG Ratings,” it was noted that, “S&P Global made headlines this month when it gave Tesla, the world’s largest manufacturer of electric cars, a lower ESG governance score (37) than Philip Morris International, the maker of Marlboro cigarettes (84).” The article notes that large cigarette companies such as Altria and British American Tobacco also beat Tesla, and most other companies, by a wide margin. It doesn’t matter that cigarettes kill more people that alcohol, illegal drugs, and car accident combined, tobacco companies have demonstrated a commitment to diversity and inclusion that vaults their ESG score into the stratosphere. According to the article “some rating systems encourage companies to market their products to marginalized groups,” with the LGBTQ+ community being a prime focus. And the tobacco companies did that in spades. But in the “you can’t make this up if you tried” category, the article noted: “In California, tobacco kills almost as many gay and bisexual men as AIDS. LGBT youth nationwide are over twice as likely to smoke as their straight counterparts, and transgender adults smoke at three times the rate of the general public.” Helluva way to get that score up, eh. The last issue is that big investment funds are applying ESG criteria to their investments as they invest other people’s money! Investors have a right to expect the best returns possible as long as a company is compliant with all laws and public policies. Many jurisdictions, especially in the United States, are withdrawing their pension dollars from any company that applies ESG criteria to their investments. I hope this trend continues, so that investors are provided with honest and fair returns free of bias and the meddling from outside groups. Robert Sopuck was the Conservative Member of Parliament for the Manitoba constituency of Dauphin-Swan River-Neepawa from 2010-2019. The Hill Times