Why ESG is fatally flawed

Chris Leithner

Leithner & Company Ltd

“The value of assets managed with a responsible investing framework has risen to $A1.54 trillion, accounting for 43% of the total (Australian) market,” The Australian reported on 12 September. 

In a survey it released that day, the Responsible Investment Association Australasia stated that $2.06 trillion of assets under management had been “self-declared as practicing responsible investment.” Tellingly, however, in research that it conducted for the RIAA, EY excluded “some $521 billion (of this amount), which failed a scoreboard of measures.”

RIAA’s survey also found that “performance concerns were the strongest deterrent to the responsible investing market … A lack of trust and concerns about greenwashing (giving a false impression or providing misleading information that a company or its goods and services, or a fund’s investments, are more environmentally kosher than they actually are) were also significant deterrents.” Yet a “climate change and sustainability services partner” at EY remains undeterred: “as a wave of mandatory reporting and product disclosure regimes comes into force, understanding the current state of the market and the range of approaches being adopted by responsible investors is critical.”

That assertion, to put it mildly, puts the cart before the horse. Instead, it’s vital first to ask fundamental questions: what exactly are ESG, “socially-responsible” and “sustainable” investing? Do they make logical sense? What are their key empirical claims? Do these claims correspond to reality? Whom do ESG and the like benefit?

This article highlights five hard truths which ESG’s enthusiasts obscure or refuse to acknowledge: 

  1. ESG isn’t just internally inconsistent: it’s fundamentally incoherent, innately subjective and in crucial respects unmeasurable.
  2. Investors’ concerns about ESG’s returns are justified: there’s no convincing evidence that “socially responsible” or “environmentally sustainable” investments outperform – and there are strong reasons to expect that today they don’t and in the future they won’t.
  3. Concerns about “greenwashing” are also warranted: some prominent ESG investment vehicles are merely high-fee bottles containing the same wine as lower-fee and non-ESG investments.
  4. As Forbes (2 May 2021) phrases it, Warren Buffett and Charlie Munger “certainly aren’t leading the charge on ESG investing.” What does that tell you?
  5. ESG doesn’t benefit investors, and on balance it likely harms them. It does, however, benefit its advocates at investors’ expense. ESG thus fails morally: its advocates encourage its practitioners to parade their vanity, ignore shareholders and evade accountability. ESG, in short, is socially irresponsible.

What Is ESG?

According to Investopedia, “Environmental, social and governance (ESG) criteria are sets of standards for a company’s behaviour used by socially-conscious investors to screen potential investments. 

Environmental criteria considers how a company safeguards the environment, including corporate policies addressing climate change. Social criteria examines how it manages relationships with employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights. ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing (SRI).”

On 22 June 2021, Terence Corcoran, a columnist and comment editor at Canada’s National Post (that country’s counterpart to The Australian), provided some key background information:

ESG has clear political origins. The term ESG was launched in a 2004 report titled “Who Cares Wins” from a United Nation’s operation called the Global Compact Initiative. It was set up by former UN secretary-general Kofi Annan. The ESG report was in turn based on the work of Klaus Schwab’s World Economic Forum and its Global Corporate Citizenship initiative.

I discern two variants of ESG. The first, which I dub “soft ESG,” seeks to devise criteria, measure companies against them and inform investors about companies’ operations in relation to these standards. Investors can then, if they’re so minded, adjust their portfolios accordingly. What I call “hard ESG,” in sharp contrast, seeks (initially by suasion and hectoring and subsequently by legislation and regulation) to compel companies and investors to conform to these standards.

This distinction clarifies a fundamental point: soft ESG may be harmless, but hard ESG is certainly immoral because it’s clearly authoritarian. It seeks to remove from shareholders the right and responsibility to devise their own moral and other standards, and invest in accordance with those standards.

The intolerable problem for hard ESG’s zealots, like “climate emergency” extremists, is that apparently too few shareholders are sufficiently fussed. They’re declining to choose as ESG’s enthusiasts demand; therefore they must lose their right to choose – and ESGers’ dictates must be imposed. 

Moreover, implicit in hard ESG is the assumption that unless companies explicitly commit themselves to ESG they don’t contribute to – indeed, they harm – society. This isn’t merely patently false: it’s clearly dangerous. ESG’s advocates claim to occupy the moral high ground – and aspire to rule from above.

Yet ESG is powerful – and becoming more so all the time. During the past several years, asset management companies and brokerage firms have offered ever more exchange-traded funds (ETFs) and other financial products that claim (but see below) to follow ESG criteria. ESG is also influencing – and in a few cases determining – the investment choices of large institutional investors such as public pension funds in the U.S., superannuation funds in Australia and sovereign wealth funds in a few other countries.

According to a recent (2020) report from the SIF Foundation, at the end of 2019 investors held $US17.1 trillion in assets chosen according to ESG – compared to $US12 trillion in 2017. Earlier this year, Bloomberg Intelligence projected that more than one-third of all globally managed assets, amounting to more than $50 trillion, could carry explicit ESG labels by 2025.

“As ESG-minded business practices gain more traction,” Investopedia concludes, “the ultimate value of ESG criteria will depend on whether they encourage companies to drive real change for the common good, or merely check boxes and publish reports. That, in turn, will depend on whether the investment flows follow ESG criteria that are realistic, measurable, and actionable.” As we’ll now see, these criteria are none of these things.

Is ESG Objective? Is It Measurable?

ESG’s advocates seldom express their starting point explicitly. That’s probably because most of them regard it as so obvious that it doesn’t need to be stated; but perhaps it’s because a few of them recognise that, if it were expressed openly, it’d be evident to many people that it’s highly doubtful – and therefore that ESG as a whole rests upon a weak foundation.

That premise is: it’s possible to devise clear, objective and sensible economic, social and governance standards; further, corporate managers can target them and investors can quantify them – and thereby evaluate managers’ success.

There’s certainly no shortage of entities that purport to devise ESG criteria and measure corporations against them. These entities include global accounting giants and investment institutions as well as national and international ratings and standards-setting agencies. 

A key fact – namely that no ESG accounting or investment standard exists – doesn’t trouble them. One global accounting firm claims not merely that such a standard will be developed; once devised, it “will empower companies, providing objective data that reinforces the value of the work being done to build an organisation’s long-term value and sustainability. Within a short period of time, it’s likely that ESG metrics will become an expected part of a company’s financial reporting and an essential tool in measuring a company’s worth today, tomorrow and in the future.”

That’s clearly wishful thinking: even if devised and adopted, which is hardly certain, such standards certainly won’t provide objective data. As Corcoran notes,

“In the investment field, there is mass confusion over ESG ratings and measurements … Ratings agencies abound, but none are consistent in their results. The ESG measurement crisis has been building for some time, confusing investors and corporations unable to bridge the underlying problem: ESG concepts are unmeasurable. How do you measure corporate gender policies, carbon emissions, community involvement, environmental management, or worker satisfaction? As one investment consultant said about the ratings confusion: “ESG by its very definition, is subjective.”

ESG’s enthusiasts occasionally and grudgingly accept that difficulties exist, but always insist that ESG is in its infancy, and that as time passes its inconsistencies and even contradictions will subside. Indeed, a few advocates have asserted that, just as bond ratings agencies’ measures of credit and default risk converged over time, strong commonalities of ESG ratings firms’ measurements will also emerge. 

That comparison obscures – or simply misunderstands – a crucial difference between default risk and ESG: default is an objective and easily-observable event; ESG, in sharp contrast, is neither. Indeed, it’s innately subjective, at best imperfectly observable and in some key respects unobservable and thus unmeasurable. One investor will place great weight upon “E” factors and less on “S” ones; another will do the opposite, etc. As a result, their views about which companies possess high ESG scores will differ greatly.

According to The Wall Street Journal (12 September), “Composite ESG scores – which attempt to summarise all material ESG risks into a single number or grade – convey little actionable investment information. ‘I have not seen circumstances where combining an analysis of E, S and G together, across a broad range of companies with a single rating or score, would facilitate meaningful investment analysis …’ said former Securities and Exchange Commission Chairman Jay Clayton during a March 2020 SEC hearing. A case in point: Tesla’s current ESG scores by two leading rating agencies are below those of Pepsi. Does this mean electric vehicles are worse for the planet than soft drinks, or that socially concerned investors should overweight Pepsi and underweight Tesla in their portfolios? ESG ratings are all over the map because the underlying assumptions, methodologies and data inputs vary widely among ESG rating agents.”

And speaking of Tesla: should ESG’s advocates laud it for reducing society’s reliance upon internal-combustion engines? Or reproach it for squandering electricity generated from fossil fuels on Bitcoin, and relying upon batteries made with lithium – which can be hazardous (not least to the ancestral lands of indigenes in Australia and South America, which enthusiasts of ESG presumably respect) and difficult to recycle? Severe quandaries afflict most other companies – including the “World’s Most Responsible Company” (see below)

It’s vital to emphasise: key aspects of governance, environmental and social standards are inherently subjective and thus in the eyes of their beholders: what you regard as a grievous environmental, social or corporate sin mightn’t even register on my list as an issue.

As an example of ESG’s innate and inescapable subjectivity, I give a weighting of precisely 0.0 to ethnic, gender and racial diversity. Whether a board or workforce contains 0% or 100% women (or Aborigines or Asians or …) is a matter of utter indifference to me. Others, however, weight heavily the board’s ethic, gender and racial composition. Indeed, in growing and powerful quarters “diversity” and “governance” have become near-synonyms. More generally, to emit CO2 and allegedly “exclude” certain demographic categories consigns a company to ESG purgatory. 

In sharp contrast, and for a bracing dose of common sense and a deep breath of fresh air, consider Warren Buffett’s criteria for the appointment of directors to Berkshire Hathaway’s board. In its Annual Report (2006) he stated:

In selecting a new director, (Charlie Munger and I are) guided by our long-standing criteria, which are that board members be owner-oriented, business-savvy, interested and truly independent … Charlie and I believe our four criteria are essential if directors are to do their job – which, by law, is to faithfully represent owners. Yet these criteria are usually ignored. Instead, consultants and CEOs seeking board candidates will often say, “We’re looking for a woman,” or “a Hispanic,” or “someone from abroad,” or what have you. It sometimes sounds as if the mission is to stock Noah’s ark. Over the years I’ve been queried many times about potential directors and have yet to hear anyone ask, “Does he think like an intelligent owner?”
The questions I instead get would sound ridiculous to someone seeking candidates for, say, a football team, or an arbitration panel or a military command. In those cases, the selectors would look for people who had the specific talents and attitudes that were required for a specialised job. At Berkshire, we are in the specialised activity of running a business well, and therefore we seek business judgment.

On 2 December 2020, the editorial board of The Wall Street Journal went further: some ESG criteria are absurd to the point of risibility:

The more we think about the new racial, gender and LGBTQ mandates for corporate directors that Nasdaq announced on Tuesday, the more absurd they seem. How is a company supposed to find out if a board candidate is gay if that isn’t already known? Is it supposed to hire private detectives to look into it? Once that person joins the board, does the company then have to broadcast his or her sexual orientation in the annual report so progressives can be satisfied that the quota is met? We could go on …

As ESG scores and ratings attach themselves like barnacles to many investors’ portfolios, researchers are examining the factors that enable companies to receive high scores and good rankings – and improve them over time. Studies find that companies’ size and location influence their scores: larger companies get higher rankings than smaller ones, and developed market companies getting higher scores than those in emerging markets. 

It’s possible that big companies are better corporate citizens than smaller ones. But it’s equally plausible that big ones have the resources to play the ESG scoring game, and that “ESG disclosure” is a clever tactic used by big companies that want to sing their own praises – and bury rather than expose operational problems.

The Most Deluded and Gullible People in the Room?

ESG’s parallels to the “corporate governance” movement of the 1990s and early-2000s are uncanny – and should greatly concern investors. During those years, consultants rushed to devise principles of governance, and accountants and regulators added hundreds of pages of disclosure and myriad other rules. Proponents of corporate governance congratulated themselves that, thanks to their efforts, shareholders benefitted. 

Enron Corp. was their poster child. For six consecutive years, from 1996 to 2001, Fortune magazine dubbed it “America’s Most Innovative Company.” Academics lauded it and MBA graduates clamoured to join its ranks. Yet on 2 December 2001, Enron declared bankruptcy.

At that time, it was the biggest bankruptcy in American history. By that time, it had become clear even to some of its boosters that institutionalised and systematic deception had long sustained it. Since then, Enron has become synonymous with corporate fraud and corruption – that is, with abysmal and even criminal corporate governance.

How did advocates of corporate governance manage to overlook these egregious malpractices? According to Wikipedia, the Enron scandal “also affected the greater business world by causing, together with (an) even larger fraudulent bankruptcy (WorldCom in 2002), the dissolution of the Arthur Andersen accounting firm, which had been Enron’s and WorldCom’s main auditor for years.”

Enron: the Smartest Guys in the Room is a 2005 documentary based upon the best-selling 2003 book of the same name by Fortune reporters Bethany McLean and Peter Elkind. “Why did no one see it coming?” was the disarmingly blunt question asked by Queen Elizabeth in the aftermath of the GFC. 

That question might just as well have been asked about Enron and WorldCom – and to their boosters. The uneasy question thus arises: during the 1990s, were the proponents of “corporate governance” actually the most deluded people in the room? An even more uncomfortable question for today is: are the proponents of ESG, responsible and sustainable investing the most deluded and gullible people in the room?

The fact that “corporate governance” initially enriched many of its advocates but eventually left shareholders mostly poorer – some of them much poorer – should provide a salutary warning to ESG’s partisans and investors as a whole. So should the fact that, according to Forbes (2 May 2021), Warren Buffett and Charlie Munger “certainly aren’t leading the charge on ESG investing.” Alas, these key facts probably won’t trouble most investors – until it’s too late.

ESG tacitly concedes that Milton Friedman was right

“Good” (high ESG score) companies, ESG’s advocates hint – and sometimes explicitly assert – grow their revenues faster, are more profitable than and are less prone to key risks than “bad” (low ESG score) ones. (Note the unstated – perhaps because it’s obviously logically invalid – assumption that companies that possess a high subjective ESG score are normatively good, and that low-ESG companies are ethically bad. It’s clearly illogical because it conflates a subjective assessment and a normative judgment.)

This second core premise and intermittent (“renewable”) energy unwittingly share a key attribute – and Achilles heel. If solar and wind energy truly were cheaper than coal- and gas-fired power, as its proponents insist (see, however, Investors beware: “Cheap" renewables are very expensive), then why do they need – and in the future will apparently continue to require – such massive subsidies from governments? Similarly, if ESG enthusiasts’ second core premise were true, why does anybody – companies, their management or shareholders – need to be forced to comply with ESG?

In his (in)famous article (“The Social Responsibility of Business Is to Increase Its Profits,” The New York Times, 13 September 1970), Milton Friedman encapsulated the paradigm of shareholder capitalism. Warning against the dangers of “corporate social responsibility,” Friedman argued that the chief duty of business was “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception …” Friedman rightly emphasised that, in a market economy, profits represent value created for customers. Corporations exist in order to operate profitably and thereby to serve their customers – and not to advance authoritarian agendas. In their capacity as corporate officers, businessmen would do the most good by focusing upon their bottom lines.

If ESG’s second major premise were true, companies would pursue it voluntarily and indeed enthusiastically. They would do so because it made them bigger and more profitable, and less prone to key risks – and not because of ESG advocates’ tiresome harangues about ESG’s alleged morality, or because major institutional investors and regulators threaten them if they don’t. The irony is delicious: if ESG’s second major premise were true, then Milton Friedman, the bête noire of ESG’s zealots, would stand vindicated!

Does ESG Improve Corporate Outcomes?

ESG, allege its advocates, will benefit companies in one or more of at least four ways: It will increase (1) a revenue and (2) profitability, and reduce (3) risk of catastrophe and (4) cost of debt. A large and fast-growing literature investigates the effect of ESG upon companies’ operations. As I read it, the evidence that ESG has a positive effect is weak at best, mostly inconclusive and certainly not compelling.

There’s some evidence that it doesn’t pay to be a low ESG score company: such a score increases the cost of funding and insurance. Significantly, however, most of this evidence comes from fossil fuel producers (many of whom have been forsaken by bankers and insurers) and “green” energy outfits (all of whom have been lavished with government subsidies).

 In contrast, there’s little evidence – and no compelling evidence – that ESG affects revenue and profitability. In particular, every study that purports to find a positive correlation between profitability and ESG score (by no means all of them do) flounders on the rocks of causality: are “good” companies more profitable, or are companies that are more profitable able to undertake actions that make them look “good”?

Does ESG Lift Investors’ Returns?

ESG’s partisans often imply (and occasionally state overtly) that investors whose portfolios comprise mostly “good” companies and few “bad” ones generate higher returns than conventional portfolios. ESG, in other words, implies that you can simultaneously do well and good. 

Even assuming that ESG can be reliably and validly measured – which it can’t – this premise, too, is fatally flawed.

If the contention that ESG increases companies’ revenues and profits is very weak, the assertion that incorporating ESG into your investing is going to increase your returns comprehensively fails a very simple test.

If you seek to generate “excess” returns, you must first ask yourself: do others also perceive the value that I perceive? As a result, do market prices already reflect these perceptions? That, in brief, is why a high-growth company, or one in a high-growth industry, etc., typically doesn’t produce excess returns (see in particular Do tech stocks really outperform their value counterparts?): others have already spotted what you purport to (fore)see; the market has already incorporated quality management, prospects for growth, etc., into prices.

Bearing these points in mind, three possibilities emerge. 

First, and in conformity with orthodox finance theory, if ESG’s advocates have correctly and fully priced both “good” and “bad” companies, then investing in “good” ones or divesting from (or avoiding) “bad” ones will have no effect upon returns. Moreover, if being “good” makes companies less risky, then investors in “good” ones will earn lower returns than investors in “bad” ones, before adjusting for risk, and equivalent risk-adjusted returns.

The second possibility is, from ESG-boosters’ point of view, even more disappointing:

If its partisans are overconfident about ESG’s effects (which I think they are) and are therefore overestimating the extent to which being “good” will boost a company’s growth and profitability (which I think they do), then investing in “good” companies will generate lower risk-adjusted returns than investing in “bad” ones (see also Why you’re probably overconfident – and what you can do about it).

Thirdly, only if its advocates underestimate ESG’s benefits (which I believe is doubtful) will investments in “good” companies generate higher risk-adjusted returns.

What say empirical analyses? Multiple studies conclude that investors who follow ESG strategies don’t do much good; nor do they do particularly well. According to Terrence Keeley, a former senior executive at BlackRock (The Wall Street Journal, 12 September),

Bradford Cornell of the University of California, Los Angeles and Aswath Damodaran of New York University (“Valuing ESG: Doing Good or Sounding Good?”) reviewed shareholder value created by firms with high and low ESG ratings … Their conclusion: “Telling firms that being socially responsible will deliver higher growth, profits and value is false advertising.”
What Cornell and Damodaran found at the micro level is also apparent on a macro basis. Over the past five years, global ESG funds have underperformed the broader market by more than 250 basis points per year, an average 6.3% return compared with a 8.9% return. This means an investor who put $10,000 into an average global ESG fund in 2017 would have about $13,500 today, compared with $15,250 he would have earned if he had invested in the broader market.

Elroy Dimson, Paul Marsh and Mike Staunton (The Journal of Portfolio Management, November 2020) agree:

Many asset managers contend that ESG ratings can help investors to select assets with superior financial prospects, and the authors therefore review the investment performance of portfolios and of indexes screened for their ESG credentials. In the authors’ opinion, ESG ratings … are unlikely to make a material contribution to portfolio returns.

Is ESG merely a ruse to charge high fees?

“You need to understand two fundamental facts about ESG or ‘sustainable’ investing,” says Jason Zweig (“You Want to Invest Responsibly; Wall Street Smells Opportunity,” The Wall Street Journal, 16 April 2021). “First, ESG is in the eye of the beholder; one investor’s paragon is another’s pariah. Second, ESG is the last best hope for investment firms seeking to hang onto fat fees.” Zweig continues: 

“Asset managers are rescuing underperforming vehicles from oblivion by converting them to a sustainable approach. One in six ESG funds has been retrofitted out of a pre-existing, often struggling strategy, according to Morningstar; last year, 25 portfolios became born again as sustainable funds. Investors, it seems, are more likely to put up with low returns and high fees if you enable them to feel righteous.”

Table 1: Carbon Transition – or Carbon Copy and Greenwashing?

As an example, Zweig compares two of BlackRock’s funds: its U.S. Carbon Transition Readiness ETF and its iShares Russell 1000 ETF index fund. Table1 compares their top holdings and their portfolio weightings, as well as their fees. Which is the ESG fund?

The goal of the U.S. Carbon Transition Readiness ETF, the global product head for iShares and index investments at BlackRock told Zweig, is “to change corporate behaviour” by “rewarding the winners and going light on the potential losers” in the “conversion to an economy that consumes less carbon (sic).” The result, Zweig deadpans, “is a basket of stocks the average investor might find indistinguishable from the market as a whole.”

The Carbon Transition ETF’s top seven companies, totalling 20.2% of total assets, are Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), Facebook (NASDAQ: META), Google’s parent (NASDAQ: GOOG - Alphabet), Tesla (NASDAQ: TSLA)  and Berkshire Hathaway’s Class B (“baby”) shares. After a fee waiver, the fund charges 0.15% in annual expenses. Its sibling, iShares Russell 1000 ETF index fund, holds the identical top 7 companies, in precisely the same order and in very similar weights, and at 20.1% of total assets, for an annual expense of only 0.03%. That’s just one-fifth of the (allegedly) ESG fund’s! “So the Carbon Transition fund looks a lot like a carbon copy of a broad-market index, but with (much) higher fees.”

Zweig concludes:

Individual investors should remember that annual expenses on sustainable ETFs … average 0.34% … according to Morningstar – more than 10 times the cheapest index funds. In that sense, ESG funds are Wall Street’s latest way to take something old, call it new and jack up the price. Greenness is largely in the eye of the beholder. Fees always put investors in the red.

In other words, and like climate change alarmism, is ESG merely another means to distract attention from advocates’ greed and hypocrisy? It seems that some people who loudly proclaim that they want to “change the world” are quietly doing quite well for themselves.

ESG doesn’t benefit investors; so whom DOES it advantage?

Why have many corporations welcomed the immense push towards ESG? Why has a torrent of funds flowed into ESG-friendly asset managers’ coffers? To answer these questions, we simply need to ask: “Cui bono?” Who benefits? We’ve seen that companies as a whole don’t benefit; nor do their shareholders – indeed, they’re net losers. In sharp contrast, the more they imbed an “ESG culture” into corporations, the more ESG rankers, score managers and consultants benefit; the more numerous and onerous are ESG disclosure requirements, the more accounting and audit firms benefit; and the greater is the number and size of ESG funds, the more their managers benefit.  

One insightful blogger (Musings on Markets, 14 September 2021) adds:

Given how much ESG disclosure advocates, measurement services, investment funds and consultants feed off each other, it is no wonder that they have an incentive to sell you on its unstoppable growth and inevitable success. Given that shareholders in companies and investors in funds are paying for this gravy, you may wonder why corporate CEOs not only go along with this charade, but also actively encourage it, and the answer lies in the power it gives them to bypass shareholders and to evade accountability.
After all, these are the same CEOs who, in 2019, put forth the fanciful but great-sounding argument that it is a company’s responsibility to maximise stakeholder wealth, rather than cater to shareholders … (In other words) being accountable to everyone effectively means that CEOs are accountable to no one. In some cases, flaunting goodness has become a way that founders and CEOs use to cover business model weaknesses and overreach. (I’ve previously noted) that Elizabeth Holmes and Adam Neumann used their “noble purpose” credentials to cover up fraud and narcissism.

On a personal but highly relevant note, I’ve been privileged to know people who’ve actually done genuine good. Their activities and personalities differ greatly, but they all share one crucial trait: they constantly do good, but they never talk (let alone brag) about being good or hector other people about morality. That, I think, is a key reason why so many people from so many walks of life rightly mourn the death of Queen Elizabeth II. 

This key distinction extends to companies and investment funds: I’m deep sceptical about companies and executives that trumpet, in their reports, regulatory filings, public statements, etc., how much “difference” they purport to make and how much “good” they allegedly do. The American journalist and writer, H.L. Mencken, hit the nail on the head. “The urge to save humanity is almost always only a false-face for the urge to rule it. Power is what all messiahs really seek: not the chance to serve.” Elizabeth Regina, requiescet in pace.

“The World’s Most Responsible Company”

According to the ABC (“Patagonia Founder Gives Away $4.4 Billion Company so All Profits Will Fight Climate Change,” 15 September), “Yvon Chouinard, the billionaire founder of the outdoor apparel brand Patagonia, is giving away the company to fight the climate crisis.” Mr Chouinard, who has a net worth of $US1.2 billion, is transferring his family’s ownership of the company to a trust and a non-profit organisation. “Each year, the money we make after reinvesting in the business will be distributed as a dividend to help fight the crisis,” he wrote on the company’s website on 14 September.

The ABC’s report concluded: “While rich individuals often make financial contributions to causes, The New York Times said the structure of the Patagonia founder’s action meant Chouinard and his family would get no financial benefit – and in fact, would face a tax bill from the donation.”

Devon Pendleton and Ben Steverman of Bloomberg disagree. In “Patagonia Billionaire Who Gave Up Company Skirts $700 Million Tax Hit” (16 September), they state: “Yvon Chouinard structured the transfer of his firm in a way that keeps control within the family and avoids hundreds of millions of dollars of taxes.” He “won’t have to pay the federal capital gains taxes he would have owed had he sold the company.” Moreover, he also avoids the U.S. estate and gift tax of 40% when his company was transferred to its heirs.

But wait: aren’t the people who demand “action on climate change” the very ones who also denounce the billionaires who fail to “pay their fair share” of taxes?

Ray Madoff, a professor at Boston College Law School, told Bloomberg: “We are letting people opt out of supporting all the expenses of government to do whatever they want with their money. This is highly problematic from the point of view of democracy, and it can mean a higher tax burden for the rest of Americans.” Ellen Harrison, a tax attorney at McDermott Will & Emery in Washington, confirmed to Bloomberg that, far from “giving the firm away,” the transaction allows Chouinard and his family to sustain their control of Patagonia.  

On 21 September 2021, The Green Market Oracle outlined “10 Reasons Why Patagonia Is the World’s Most Responsible Company.” Reason #2 is “transparency.” “There was never an ask from the Chouinard family that we avoid taxes” when structuring the transaction, said a Patagonia spokeswoman. Nor, however, did any mention of its enormous tax advantages to the family appear in Chouinard’s and Patagonia’s self-congratulatory statements. Says GMO: “Patagonia welcomes constructive criticism that is part of the growing transparency movement at the core of sustainability.”

The American Petroleum Institute has obliged. It observes (“Patagonia and Petroleum,” 16 April 2019) thatPatagonia’s view of petroleum is conflicted. While the company is against fossil fuels on climate grounds …, it also is forthright about the use of nylon and polyester in parts of its product line – acknowledging that both are made from petroleum.” Patagonia rightly contends that there’s no alternative:

It is remarkably hard to reduce the environmental impact associated with our technical gear, especially our shells. Unlike other products we make, a shell is a lifesaving piece of equipment that absolutely must perform in the world’s worst weather. Unfortunately, to meet that standard of functionality we rely on fossil fuels. While Patagonia continually searches for alternative materials and processes, our environmental ambitions still outstrip current shell technology.

In other words, Patagonia denies others’ right to consume fossil fuels (“they’re causing climate change!”) but defends its right to do so (“we can’t do without them”). API concludes “Petroleum-based materials are a big reason Patagonia’s products are what they are: light-weight, water-resistant – even life-saving. We’d argue the varied uses of petroleum in manufacturing are part of what make natural gas and oil great, now and in the future.”


ESG and related notions (corporate social responsibility, ethical investing, impact investing, socially responsible investing and sustainable investing) are fatally flawed. They fail investors, businesses and society as a whole – but reward a small coterie of advocates. ESG is internally incoherent, and its enthusiasts’ conceptions of “ethics” and “responsibility” reflect a growing authoritarian (and hypocritical) streak in Western societies. 

That’s why I reject ESG’s frequent use of these and other nice-sounding terms: in truth, it seeks to extinguish others’ choices – that is, their right to exercise morality and responsibility – and, adding insult to injury, use investors’ money to line their own pockets. Yet ESG’s advocates parade their vanity, ignore shareholders and thus evade their ethical and legal accountability to shareholders. In that crucial sense, ESG is the polar oppose of what it claims to be: it’s authoritarian and irresponsible.

I’m hardly the first person who concludes that ESG and related notions are fatally flawed. More than 50 years ago, Milton Friedman belled the cat: “Businessmen who talk (the language of corporate social responsibility) are unwitting puppets of the … forces that have been undermining the basis of a free society …”

Similarly, I’m hardly the only person today who regards ESG and the like as fatally flawed. Zero Hedge, in a series of articles over the past few years, has lambasted it as a “fraud,” “scam” and worse; the editorial board of The Wall Street Journal has ridiculed it as “absurd;” and Warren Buffett regards ESG reporting as “asinine.” Terence Corcoran of Canada’s National Post rejects it comprehensively: it is “a wildly unscientific agglomeration of investment models that have no consistent basis in fact or data, no measurement systems, no objective standards, no consistent rating systems and no clear accounting standards.”

Like the aforementioned astute blogger, “more than ever, I believe that ESG is not just a mistake that will cost companies and investors money, … but (also) that it will create more harm than good for society.” Terrence Keeley, a former senior executive at BlackRock, gets the last word – and issues a challenge:

ESG draws scorn from the left for being too timid and from the right for being too aggressive. The harder truth is that ESG is largely failing on its own terms. Despite tens of trillions of ESG investments, investors haven’t done very well nor generated much good. ESG advocates need to do better or stop claiming they can.

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This blog contains general information and does not take into account your personal objectives, financial situation, needs, etc. Past performance is not an indication of future performance. In other words, Chris Leithner (Managing Director of Leithner & Company Ltd, AFSL 259094, who presents his analyses sincerely and on an “as is” basis) probably doesn’t know you from Adam. Moreover, and whether you know it and like it or not, you’re an adult. So if you rely upon Chris’ analyses, then that’s your choice. And if you then lose or fail to make money, then that’s your choice’s consequence. So don’t complain (least of all to him). If you want somebody to blame, look in the mirror.

Chris Leithner
Managing Director
Leithner & Company Ltd

After concluding an academic career, Chris founded Leithner & Co. in 1999. He is also the author of The Bourgeois Manifesto: The Robinson Crusoe Ethic versus the Distemper of Our Times (2017); The Evil Princes of Martin Place: The Reserve Bank of...

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