Journalism is important. When you look at societies throughout history, the flow of information, and misinformation, can be pointed to as a root cause of real-world actions. Hitler’s propaganda machine allowed, well, Hitler. It’s a confluence of societal conditions (things were real, real bad in Germany at the time) and purposeful effort to sway public opinion, and, unfortunately, it works … sometimes with bigger consequences, sometimes with lesser.
For instance, the NYTimes did a piece a few days ago analyzing why young people are sour on an otherwise impressive economy in the US. They show the economic data, and it’s pretty clear our economy is strong: US unemployment is way down, job openings way up, and wages have kept pace with inflation (impressively).
So, why are young people sour on the economy and feeling pessimistic? Well, because social media. It’s pretty easy to become a TikTok influencer through complaining and cool graphics. It’s much harder to do so through good journalism. Turns out, the NYTimes reporter spent a day watching IG reels and TikTok vids complaining about the economy, and found that many influencers were turning people toward the negative on what is otherwise a pretty solid economic situation. Why? Because it sells.
So, well, social media. Not much to be done there, except to keep telling everyone to watch The Social Dilemma and try to get them to read real news (ahem, send them here, duh!). Hopefully people will see that, and understand that everything they see on social media is likely unchecked, unproofread, unprofessional, biased, and sensationalized. (So, if you’re feeling aggravated by people regurgitating memes as if they’re real news, host a movie night, show the The Social Dilemma, and have them over.)
But when an actual, professional journalistic outlet blows a story badly…
… it’s a bit more eye opening to those of us who care about journalism, and getting the truth right. So is the case in an episode of Freakonomics, an economics podcast I have historically thought highly of, until this episode. The episode was about ESG investing — under the clickbaity title of “Are ESG investors actually helping the environment?”
ESG, for those relatively unfamiliar, stands for Environmental, Social, and Governance. It’s a tool used by investors to analyze risk for investments they make that takes into account some of the things that don’t traditionally show up in financial statements, like: environmental liabilities coming with new regulations (E); workforce health and safety, employee engagement (S); systematic structures for encouraging good labor practices, fair pay, and the like (G). These are real considerations that an investor, in my mind, has a right to know, because they legitimately affect the future performance of a stock.
It has become exceptionally controversial, like all things these days, with some in the political spectrum suggesting this is not something that companies should have to disclose, nor that investment managers for things like endowments, trusts, and the like should have to consider. The reason why is obvious, once you dial it in — companies that tend to score better on ESG are those that don’t have large footprints of externalized costs. Externalized costs are real costs generated by a business, but not paid for by that business. Climate pollution is a major example, of course. If Exxon had to pay for the climate pollution its product creates, that would add some cost to its business, which Exxon would then pass on to consumers. Gas prices would rise by a commensurate amount, and the result would be more people frustrated at the pump and more people switching to EVs and cleaner energy. The economics would simply work better.
I’ve argued before that capitalism is great but the way we practice it is fundamentally broken. Internalizing that externalized cost is one of the most fundamental breakdowns of modern capitalism. It allows polluters to put the cost of their activities onto us. And it is one of the most critical switches we need to make to society in order to avert environmental disaster. The real cost of a product MUST be reflected in the sticker price. Otherwise, markets won’t move toward a more sustainable future.
So, I would argue that the blowback against ESG is fueled by power brokers who are in alignment with polluting industries. It’s not rocket science.
In the episode, the interviewer seemed to be lobbing softball question after softball question to an economist, Kelly Shue, who had published a study about ESG investing and how it is actually counterproductive. One of her main arguments was that, by divesting from bad ESG companies, we effectively punish them and make them have higher borrowing costs. Higher borrowing costs, she argues, means they might not have access to the capital needed to transition to a greener model. She also argues that there’s an 80/20 rule — 20% of companies are responsible for 80% of pollution. It’s a good point, something I agree with her on. But then she takes that a step further and says that if ESG runs these companies out of business, society will suffer dire consequences. Who will make jet fuel, for instance? Paint thinner? Some things are hard to green up, but are necessary to a functioning society, she says.
My beef with that line of argument is that, well, that’s capitalism! If free marketeers want to use capitalism as a shield against any regulations, okay, sure, but this (ESG) is outside regulation, and it serves to fix a part of capitalism that is clearly broken and that governments have, so far, been mostly unwilling to touch. There are, of course, notable examples, like the Extended Producer Responsibility laws passed in some states and countries, but for the most part, polluters get away with polluting and having us foot the bill. But this is the free market fixing problems, exactly as the libertarians would, hypothetically, argue for. Except when it doesn’t align with their investments, I guess.
Consider this — a Harvard study found that the coal industry in the US offloads $500 billion a year onto us through public health costs. Internalizing those costs would make coal power that much more expensive than solar, wind, and geothermal. What would happen? Well, market demand would increase for more solar, wind, and geothermal energy. ESG driven free market economics can absolutely save the day, but externalities compromise true capitalism, and slow it all down.
The episode missed the mark on so many levels it was hard to know where to begin.
One of Shue’s other arguments is that if we make those 20% of companies less profitable and raise their cost of borrowing, they won’t transition, and the bigger risk is that they cease to exist entirely, leaving society with glaring holes (who will make paint thinner, after all??). It seems like a pretty glaring error for even a freshman level economics course — that if there is market demand, someone will find a way to make the product (supply). According to Derek Strocher, CFO of Calvert Impact, an impact investing firm, “the outcome is very unlikely to be as the podcast insinuates, that the service would go away entirely, without an alternative in place, because of the ESG movement, and society would just have to live without” these critical services, like paint thinner or long-haul aviation. The cost may be higher, however, and we can easily make the argument that that’s a good thing.
If polluting companies entrench, it makes them more susceptible to disruption from startups that are creating better products. It makes the price of their dirty products/services higher, which then results in market demand for other products that fill the need, and thus, optimal conditions for innovation! And we all like innovation, right? Even free market capitalists like innovation.
Tim Nash, founder of Good Investing, pointed out that the podcast would have you believe that ESG was just E. Sustainability is a widespread topic, and sustainable investing strategies that exclude things like firearms and tobacco are far more dominant a “sustainable” investing strategy than ESG (which, again, she conflates as a strategy, rather than a tool).
Tim Mohin, former Chief Executive of the Global Reporting Initiative, suggested in a critique of the episode that Shue missed the mark several times, and then took it to cray-cray levels as she suggested that ESG investing was a misguided effort by liberal do-gooders who “want to feel good about themselves,” which Mohin describes as a “thinly veiled political swipe at an entire profession backed by trillions of dollars and decades of experience and results.” He suggests Freakonomics failed to even provide the perspective of practitioners in the ESG space, and said, “there were so many omissions that the story seemed to be a set up to denigrate the field without much evidence.”
Given the now hyperpolarized situation, with entire governments banning even the consideration of ESG in investments of public endowments (we’re looking at you, states of Texas and Florida), it would not be hard to envision this episode (and Shue’s research!) as part of a broader PR effort underwritten by the fossil propaganda machine. Recall that, for the last several decades, the fossil folks have been infiltrating prestigious higher ed, with strings-attached donations that put libertarian thinkers in tenured positions. When those “prestigious” researchers send their Yale research to journals, it likely gets away with a few more omissions and flawed thinking than better science from lesser institutions. The Kochtopus tentacles extend everywhere — and they serve to slow down everything in the clean energy transition.
I reached out to Freakonomics several weeks ago and got no reply. I’ll update this story if I do hear from them.
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