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What is ESG and is It "the Devil Incarnate"?

Updated: Nov 11, 2023

ESG popped up in the news this weekend after Tesla's Elon Musk tweeted to his 80.2 million followers: "I am increasingly convinced that corporate ESG is the Devil Incarnate."


So what is ESG? What are some pros and cons of ESG? What is Musk talking about?


What is ESG?


ESG refers to criteria investors use to evaluate the environmental, social, or governance ("ESG") impact of business decision-making. Those businesses that satisfy ESG standards may receive preferential treatment from investors.


"Environmental" obviously refers to the effect of a corporate action on the environment. "Social" refers to the business's relationships, specifically with employees, customers, and other businesses (especially with an eye towards those other businesses' satisfaction of ESG criteria). "Governance" focuses on the internal operations of the business.


What are the benefits?


ESG's fans would argue that following ESG criteria is its own reward. That is, businesses behave the way they ought to behave (promoting a cleaner environment, corporate transparency, encouraging other parties to do the same, etc.). ESG's skeptics would argue that the benefit should just be attracting investors, but there is also some evidence that ESG correlates with better financial performance.


What are the downsides?


ESG triggers some reporting requirements, so the business is asking to be more tightly regulated. ESG brings with it greater costs, which are necessarily passed on to workers and customers. ESG has also led to claims of "greenwashing," or doing the bare minimum in order to qualify for the benefits without making any meaningful changes. And there is evidence that ESG's correlation with better financial performance is not causation.


What is Musk talking about?


ESG receives a lot of criticism, and especially from those on whom it is imposed. I suspect there is more going on behind the scenes to which we are not privy. I'll leave it at that (for now).


Conclusion


ESG is a topic that deserves its own post (or a few), as it isn't just for publicly-traded businesses. But at a minimum, I think we can say that it is not "the Devil Incarnate."

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