ESG : Being All Things to All Men

photograph of jay powell, chairman of the federal reserve. on one side are the words 'all things to all men' and on the other side it asks 'what does Powell have in common with the investor's experience of ESG. This illustrates Charles Gillams' argument in his current post on ESG

I have been attempting to not write about ESG all year, as passions run high, and it feels to be more about faith and politics than Environmental Social and Governance (whatever that is) itself, as they encompass an incredibly wide set of issues, now being squeezed remorselessly into a few tick boxes.

However, I have been greatly enjoying Simon Schama’s magisterial tome on the Batavian Republic, as the Netherlands were known during what we loosely call the French Revolutionary wars. The analogies to the situation today are startling.

Can you Take a Position on ESG Issues?

In the environmental universe, I personally tend to be far more a “dark green”, than a “light green”, which in very crude terms holds that sustainability is not a matter of work-rounds with the “same as before” levels of consumption, but of a reshaping to avoid the extraordinary growth in raw consumption seen over my lifetime. More Monbiot than Musk, you might say.

Yet on trade, by contrast, I would ally strongly with the ‘Social’ part of it: nothing frees a nation like free trade, and nothing builds prosperity so fast. Just ask the Chinese.

A new Form of Colonialism?

Free trade also includes the free movement of capital, so that the relentless red lining of the most impoverished third of the planet on the grounds of failing to meet our Western standards of governance, feels very much like old colonial exploitation.

Effectively you’re saying – ‘yes, do sell what you like, made by who you like, using what you like, but just not to our markets’.

How can anyone be in one place on all of these often-opposing issues? If you are, the investable universe shrinks to nothing, or indeed paradoxically becomes everything. I have seen ESG bonds where China and Qatar were the top holdings, I am sure on perfect ‘E’ box ticking, but not my idea of either the ‘S’ or the ‘G’ part of it.

Governance, the most Elastic Concept of all?

While in my experience, few things have so powerfully increased inequality as remuneration committees, festooned in ways to line the pockets of directors, and singularly toothless in their stated aim. But all it seems fine on the weird ‘G’ criteria.

There are many other fraternal and earnest slogans now hiding deceit. Several of the current entrepreneurs most carefully cloaked in greenery and its social equivalent, have a decidedly old-fashioned view of governance, a fondness for non-voting shares and other tricks, and boards stuffed with their mates, which then also leaves the substance of the ‘G’ part well short of the mark.

So, to me ESG ends up as so wide, that an investor who really cares must pick and choose where to place the emphasis. Yet even this is seldom possible, in part because so many collective instruments are already being packaged in strict tick box compliance, which massively restricts your options.

The curse of all index investing is you end up taking a set of equities typically based on their market capitalization, so “desirable” stocks by definition end up in wider and wider sets of indices. As so much is now index investing, you are then forced to acquire both sheep and goats, with little chance of avoiding one and adding to the other.

However, as a fund manager you must always play a twin game, of either allocating capital to where it is most productive or allocating capital to where it is most popular. Clients tell you they desire the former, so they want good ESG credentials, but actually want to have the best return too, in other words the latter.

Governments, as China is now clearly showing far prefer (as they must) the productive to the popular. Popularity is proving dangerous in that market, as therefore is for now, index investing. Just as you pile into owning the latest media sensation, the state starts destroying it, almost a re-run of our experience in investing in UK banking.

All of which leads me to conclude that like anything else in markets, ESG can be good value, but can also be poor value; what it can’t be is always wholesome. Investors should realize that if it is not to be all things to all men, it must also ultimately cause them losses as well as gains.

I could add a line on Jackson Hole and Jerome Powell, but that is all that it deserves, nothing new was said.

I notice that he too has become, skillfully, all things to all men.

Charles Gillams

Monogram Capital Management Ltd 

Holiday reading – Simon Schama – Patriots and Liberators.

book cover of a book by simon schama, called patriots and liberators. Charles Gillams calls it a magesterial tome on the Batavian republic, and recommends it to his readers.
Book cover

Simon Schama unpicks the eternal power and politics questions, seen through the simpler although less familiar lens of the Dutch.  

I now finally understand what Camperdown was all about, so apparently it is not a racecourse, after all.

Although the Anglo Russian invasion of Holland remains mysterious, it does remind us how fleeting our alliances are.

The British showed considerable skill in repeatedly landing in Holland, looting the place, seizing much of the Dutch fleet, and then executing a negotiated evacuation, when they had clearly failed in their main mission of “liberation”, without too much embarrassment: an under rated skill it seems.

The sheer impossibility of nation building by force and myriad other democratic puzzles were exhaustively thrashed out by the Batavians, under the baffled eyes of the French invaders. Nothing changes, it seems.

While the sections on taxation and local government are rather strangely relegated to near the end, but feel to me, something of a connoisseur of both, perpetually modern. This was the period when the old inherited ways were first discarded, and our new ‘modern’ systems sketched in.

Their arguments over decades are now ours too. The clash of a European superpower and democratic freedom rings true still, the crippling burden of an overmighty, half blind and deeply corrupted centre remorselessly subverting the myth of its own creation by greed, the utter folly of war and the deep atavistic permanence of old boundaries are all visible.    

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