Implications of ESG

The Implications of Environmental and Social Governance

By Benjamin Jefferson

May 20, 2022

Primer 

It was December 2019 and my business was set to start the new year, 2020, off with significant growth. We had several fairly large projects that would have accelerated our business performance by a factor of three. We were doing business all over the continental United States. Business was looking very good. A short time thereafter, murmurs of a virus started spreading. As my team started getting projects underway, we were beginning to be told by our clients to “pause until further notice.”  As the weeks passed by with no movement of any projects, we started wondering if these projects were even going to be moving forward at all. News broke that several of our clients, which were good paying, loyal, and large companies were laying off people. All of our clients reduced their operations significantly. These actions severely adversely impacted my business. 

The weeks turned into months and revenue was being generated from only one ongoing project. With that, to keep the current project going, we had to finance that particular client. Even after giving the client a payment plan, the client was having a hard time paying their bills.  

By June of 2020, I decided to weigh our options, which were few and far between. Option 1 was to continue to operate under the current modus operandi. Option 2 was to shift our business from Industrial Automation and System Integration service to something more consumer based like computer repair. Option 3 was to stay in the related field of industrial automation and complete some of the products I had been working on for the past 10 years while developing solutions for others. There was no option to get a job because there were no jobs available. All other options were off the table as I would not succumb to this type of failure. 

I chose option 3. The only problem was that funding was getting tight. Much of our current savings was already taking a hit. With the client we had at the time not fulfilling their financial obligations to us, we had to keep ourselves afloat paying for a mortgage, medical, dental, food, medications, and other basic living expenses. Not only were we paying for their services, we were also financing their expensive hardware. This was a mighty burden to have on our shoulders. 

Next Stage 

Pivoting to product sales from a company whose sole business was services was a fairly large feat. The difference is that product design requires self-financing while services provide a path for payment while a system is in development. That change required a shift in our approach for funding. I needed to start looking for investors. Before even mentioning anything to an investor, a team of us, over a period of several months, created a gambit of literature and presentation material  to illustrate to a potential investor that our business would be highly profitable. 

By September 2020, we were ready (enough) to approach probable investors to review our literature and allow me to present our offerings. To my surprise, I had quite a few indicate that they were only interested in businesses invested in ESG. At the time I thought “OK. How does my business not fit into this category?” Many of our product offering were monitoring and data collection, remote controlled industrial systems, and low power computer solutions. Upon immediate and quick research, it seemed like, to me, we had solutions to fit criteria surrounding the ESG implementation. I later found out that investors interested in ESG would only look at my investment portfolio if it specifically had ESG in the presentation and showed how the investment fit into the ESG ideological umbrella.  

Environmental and Social Governance 

To further the discussion, allow me to define Environmental and Social Governance (ESG). ESG is an ideology that is supposed to “impact the sustainability and ethical practices of a company.” The idea of “sustainable” is not meant for the company’s sustainability; rather, it is meant in relation to the sustainability of the planet – concentrating on climate change. Essentially it targets investors to only invest money in socially responsible ventures, even if that investor does not make nearly as much money as he/she/they could.  

Investors who position themselves under the canopy of ESG may look at the perceived environmental impact of the investment. For example, one might look at the level of pollution or waste generated by the company’s production process and make a determination whether to apply money for that particular company’s growth.   

It is important to understand that ESG is about what investors are directing his/her/their capital towards. At least that is for now. Note that ESG is gaining in popularity, quickly. One major aspect of ESG is that there is no clearly defined set of metrics or rubrics that determine what an ESG investment is or even looks like. It is completely based on what is socially acceptable. 

The Gimmick  

You may be wondering who or what dictates what an ESG investment is. You may also be wondering how it affects the average everyday American. To answer these questions, let me put it into perspective.  

You may be the type of person, like me, who sets money aside into a mutual fund and/or a 401K and/or Rollover for retirement reasons and therefore look to investment firms to manage your money. These investment firms act on your behalf to place your money into companies that should become more profitable as time progresses. As the businesses grow, you, in turn, get a return calculated by the number of shares you hold. Somewhere along the line, the firm you entrusted to make those financial decisions for you gets paid as well. 

ESG comes into play in regards to a set of subjective rules that a potential investor or firm will consider to help determine if he/she/they will move forward. These rules tend to be based on social responsibility and can be fairly arbitrary. Just as a very simple example, for the purpose of explaining ESG, say for the month of October, the social trend might be to post a pink ribbon on all of the company’s social media accounts. If that company was courting investors to grow the company, an ESG investor would be looking for this trend in their research of the company.  If that company did not follow the ESG trend, then the investor would walk away from the deal. 

Superficially, ESG sounds like a great idea. Who doesn’t want to be socially responsible? Naturally, people want to support good causes. If there are things a person can do to protect the environment, I am sure many of us would go out of our way to do the right thing. Looking at a lasting trend, many of us do our best to separate recyclables from actual trash. Nike was recently in the news about actually making shoes that can be disassembled easily for recycling purposes. Research would find that the vast majority of people in the United States do their best to be responsible stewards of the small piece of Earth they inhabit. Everybody works together, taking extra time out of their day, acting upon their due diligence to ensure that everything our local government tells us can be recycled makes it into that special bin. In other words, we inherently want to be responsible. 

The problem lies in the very fundamental reasoning of the ESG movement – using social pressure to force something to happen or even an outcome. This goes against everything the United State stands for. The most notable argument against ESG is the idea of FREEDOM. The very first amendment of the United States Constitution is the freedom of religion, freedom of speech, and the ability to redress grievances against your government. The fact is, ESG issues a social score (or credit), either written or unwritten, based on the actions or inactions of a company. This actually affects everybody under the sun. There is a LOT to go over, so sit tight and enjoy the ride. 

At this point you may be thinking “who cares what investors do with their money.” Quite a few people are going to think “corporations aren’t the government, so it does not matter.” The fact is, ESG, the current implementation of it, can actually topple governments. People reading this need to understand that cash is king. Without money, people can’t pay their mortgage; they can’t buy groceries to put food on the table; they can’t pay for the basic necessities such as electricity or water to the house. 

This is the point where you will say “Ben, this is crazy. You are nuts.” Am I? How many “conspiracy theories” have come true over the past couple of years? 

This is the truth! Companies like Blackrock and Vanguard have more money that the typical American can fathom. They have enough money to force or retract investments. Let me explain in a little more detail. Say Blackrock owns 15% of a certain company. Or Blackrock owns 7% of a company and Vanguard owns 8% of the same company. It just so happens that Vanguard owns a majority stake of Blackrock. Vanguard has a significant ownership of a particular company as well as the investment company Blackrock. These investments are in the billions of dollars. That is between nine to eleven zeros! NNN,000,000,000. To put this into perspective, middle-class Americans make roughly $78,000 (per research performed by CNBC) – that is 13,000 times more money than an average American has. If Vanguard management decides one day that a company, from which they hold a large number of shares, is not socially responsible to their degree based on their new arbitrary standard, then they could threaten to sell their shares thus dropping the value of that company. The stock would drop and investors would most likely jump the sinking ship ultimately wrecking the company.  

Here is the cold hard truth. Business growth requires investment. Organic growth is extremely hard. Many businesses look to investment to grow. Take a brief look at the oil and gas industry. A tremendous amount of energy is spent identifying and executing a plan to extract crude. A huge amount of the population has no idea what it takes to extract crude and natural gas from the Earth. The oil and gas industry, which engages thousands of businesses, looks to banks and investors to provide the financial resources so that these businesses can acquire equipment, employees, and whatever else they need to be successful. 

Now suppose that Vanguard has a certain set of “ESG rules” from which they invest. The issue here is – what aspect of the oil and gas production process is an investor, interested party, or money manager (i.e. Vanguard) looking at? Are they looking at the potential amount of money to be made from the venture? Or the number of jobs that will be created in order to complete the objective? Or the perceived greenhouse effect it has due to the exhaust of vehicles? What data does the investment companies look at when determining if a company fits into the ESG umbrella? Is ESG investing based off of perceived or factual information? 

The oil and gas industry is taking a severe beating these days. The ESG movement is not helping. In fact, it is compounding the problem in the sense that banks and investors are severely discouraged by climate change activists from lending money to the oil and gas industry (see Fossil Free Finance Act as an example) in lieu of more “green” energy alternatives. The idea is that the exhaust from the usages of fossil fuels is destroying the environment. There have been scientists on both sides of the argument – some saying fossil fuels are to blame for the degradation of the environment while others say there is more to the climate equation. The public perception is, in recent days, that fossil fuels are bad and the world must do without. This is largely due to massive marketing campaigns, legacy media publications, and political outrage. The result is higher gas prices. The climate crisis activists have curtailed investment into the oil and gas industry and thus the public as a whole must suffer substantial cost increases to get to work, heat your home, go get groceries, and get deliveries. Don’t forget about all of the jobs lost. The cancelation of the Keystone XL Pipeline cost many thousands of Americans their jobs, whether directly or indirectly. As investments dry up for this industry, more jobs will be lost. 

True Impact of ESG 

The worst has yet to be said. Raising the bar a little, let’s discuss if the ESG investment ideology takes root and prospers.  

Texans enjoy their freedoms. One of their freedoms is the legal ability to open carry a firearm on their person in a public space. In addition to that, a Texan can apply for a concealed weapons permit so that he/she can hide a firearm on his/herself. Either way, a person is free to carry firearm protection. To many Texans, this is an incredibly important right to have. 

Texas is home to many businesses, small medium and large. These businesses employ many people. Many of these businesses look to investment for a variety of reasons. Whether it be business growth, a long-term equipment lease, short term rental, building construction, ramping up production, and so on and so forth, a business will require some level of investment or loan. 

Say some time in the near future, the overlords of the ESG movement (those who are on the executive team and/or the board of investment firms and banks) determine that an individual’s right to own a gun is socially irresponsible. Or maybe these decision makers determine that being able to carry a firearm should be illegal. They can make their case that it is socially irresponsible to carry a gun and therefore will no longer fund companies who reside in a state that allows for a person to carry a gun. With the ESG movement going the way it is now, banks and investors will be deterred from investing in Texas businesses. The Texas economy will become stagnant. Jobs will be lost. Tax revenue to the government will be lost. It will become harder and hard to put food on the table for Texas residents. Texas will be forced to comply to the ESG ideology. Social bullying would now be seen as acceptable.  

Conclusion 

From a theoretical standpoint, ESG seems to have good intentions. However, with investment firms such as Blackrock and Vanguard having as much financial resources as they do, they can determine on a whim what is socially responsible and acceptable.  

Many of us, as a people in the United States, inherently want to be good and do good. Our values reflect that and therefore it only seems natural to want to adopt the ESG ideology. The biggest problem with ESG is that it requires a hivemind collective mindset. In other words, it is the “queen bee” that determines what is socially acceptable. If the decision maker(s) determine that it is socially acceptable to ostracize a particular racial or religious group, who is to stop them? Don’t think this can happen? Look what happened to Germany less than a hundred years ago. Look what is happening to outspoken conservatives and certain republicans. 

ESG is extremely dangerous because it uses money to engineer social norms. It is the one thing that can topple a government.