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Is ESG A Good Investment Strategy?

ASK BART: Is ESG A Good Investment Strategy?

America's Newest Scam

- By The Notorious CFP®


Of course it's not. 

The first thing to understand about this subject is that Wall Street hasn't created much in the way of useful innovation in over a decade. To be fair, though, the Robinhood trading app for Millennials made it easier than ever before for retail investors to destroy their financial lives in an instant from the palm of their hand, as well as use them against their own best interests while enriching the balance sheets of hedge funds like Citadel. But otherwise the industry has remained pretty static. I mention this only to set the stage for the securities industry's newest fad: Environmental and Social Governance (ESG), which is a type of investing strategy that evaluates "the extent to which a corporation works on behalf of social goals that go beyond the role of a corporation to maximize profits on behalf of the corporation's shareholders." (Wikipedia) 

Are you nervous yet?

This new type of investment analysis is interesting and important because for the entire history of stock markets and associated capitalism (and all other forms of economics) stretching back thousands of years of human evolution, from the very moment the first organized business entity was formed (presumably in a cave around a campfire) until just a few years ago, companies generally prioritized one thing over all others: profit. It was left to industry and government regulators to police them, but not other companies. For those that slept through Econ 101, the primary advantage of capitalism is that it was the best model ever invented for making it easier to align the incentives of the workers (labor) with that of the corporation (capital), it's shareholders and greater society as a whole. It's not perfect, but it sure as hell beats the alternative.

Millennials and Gen Z ("Zoomers") disagree, but the laziest generation in American history is not where I turn for opinions on hard work. Change my mind.

I guess most of these brilliant young minds slept through the home life class where they taught 20th century world history. 

Yeah, a third of Baby Boomers favor socialism. I'm sure. I'd LOVE to see that polling data. How many times did Jane Fonda get to vote?

Speaking of Boomers, with their recent, ongoing and accelerating departure from the domestic workforce and their handoff to the Millennials (born between 1980-1996) generation, the latter is now sufficiently ensconced in the highly-valued (but professionally dubious) roles of mid-level management throughout corporate America. The generation in between, GenX (1965-1979) was the one "that nobody wanted" - birth control, abortion, no-fault divorce, etc.- so they are small in number compared to the other two and their levels of work ethic and intelligence are quite close to the Boomers, so for all intents and purposes no one really cares about them. If they also posses undesirable skin color and reproductive organs, then in my experience their primary role is primarily to do the work and shut up. 

As their Millennial predecessors have risen to prominence, they have introduced new dynamics into the workplace- including flexible work standards, what's the bare minimum to be considered "employable," bring-your-dog-to-work-day, threatening your boss and social justice in the office. What a special cast of characters! The stark dichotomy between GenX and Millennials is so pronounced that (interesting bit of trivia) the term "GenX" was actually coined AFTER the term "Millennial" (or GenY). Because of course it was.

With Millennial ascendency into the halls of power in most American corporations, the time appears to be right to expand the role of companies to go beyond simply maximizing profits for shareholders and maintaining the infrastructure of a modern society, to other priorities like being like woke and stuff. Like a grenade exploding at the top of Maslow's Hierarchy of Needs, the Western world and businesses have apparently now evolved to such a level of success and comfort that they can sit back, relax and focus on cultivating "a holistic work environment that guarantees equitable circumstances, diverse environments, and confirmed inclusion opportunities for all employees." They're bringing to corporate America the priorities they didn't even know they needed!

The second thing to understand about ESG is that many times when new government regulations are rolled out in any industry, there is a certain portion of the initiative that is intended for the common good of society. There is also another, often more substantial component that is focused solely on creating jobs for a portion of the workforce that is otherwise unemployable. Strangely, it also tends to perpetually enlarge, like a cancerous tumor. Many aspects of civil service already maintain maximum employment as their primary function (i.e. Department of Transportation, Transportation Security Administration, Department of Education, Department of Motor Vehicles, Department of Energy, The Executive Branch, etc.).

Even private corporations are getting involved in this exciting trend, as the field of Human Resources has been created over the past fifty years largely to employ white females, while Diversity, Equity, and Inclusion (DEI) jobs followed quickly behind to create the actual jobs for college graduates from underrepresented (and expanding) genders, colors and sexual orientations. One paramount objective of DEI is to improve diversity statistics at the higher, better compensated levels of those publicly-traded companies compelled to prioritize merit, intelligence and work ethic in more important departments such as sales, engineering, research and development (i.e. without regard for how someone looks on the outside). 

There is an interesting connection between ESG and DEI because a company must score high in certain DEI racial, gender and sexual quotas to qualify for and exceed ESG corporate scoring criteria. But ESG is so much more than obsessing over external, immutable human characteristics. Does a company add rainbows to their logos during Pride Day/Week/Month? Do they donate the minimum amount of money to corrupt extortion syndicates like Black Lives Matter? Do they support reparations from descendants of slave owners to the descendants of slaves, using the IRS as the arbitrator? Do they have Ukrainian flags and pronouns in their social media bios? Do they return their shopping carts? Does their speech align with the political party currently in office? Are they willing to terminate employees that insist on 'my body my choice" in regards to quarterly government injections?

As you can see, ESG makes it easy to separate the good companies from the evil ones. One problem, however, is that some feel that the term "social goals" can be subjective. One political persuasion might (theoretically) seek to free a specific demographic from three generations of servitude, helplessness and poverty by promoting self-dignity and self-sufficiency, while another might prefer to keep them enslaved to a failed and self-destructive ideology and neighborhood that distains the nuclear family structure, promotes violence and drug use, ensures they will never be truly free, successful, nor enlightened, so that they continue to vote reliably for more and greater bondage.

Another political party might (theoretically) seek to prevent rampant inner city criminality by increasing and strengthening law enforcement in the lowest income neighborhoods, while another might see such bigotry as racist, patriarchal and not sensitive to BIPOC, preferring instead to remove the rule of law in order to maintain and even accelerate ethnic genocide. One ideology might want to keep a certain sector of society small and powerless through expanded reproductive rights, while another might abhor and reject the concept of eugenics even if it means Americans of certain skin pigment expands and assume more control. As you can see, social goals do indeed appear to be subjective, fluid and highly controversial. One person's desire for bodily autonomy is another person's genocidal slaughter. But despite the complexity and the risk of abject failure and a tearing of the social fabric, the adherents of ESG power on. 

The third thing to understand is that ESG is a poor investment, as Harvard itself recently proved conclusively when it added yet another study to a growing body of research (Univ. of Chicago, Columbia University and London School of Economics) demonstrating that even with the massive amount of woke money literally pouring into the sector, polluting your investing strategies with personal politics is still ineffective and even detrimental to long-term investing success.

Calm down, Zoomers. You still have paper straws and Ukrainian flag social media avatars.

"Investing in sustainable funds that prioritize ESG goals is supposed to help improve the environmental and social sustainability of business practices. Unfortunately, close analysis suggests that it’s not only not making much difference to companies’ actual ESG performance, it may actually be directing capital into poor business performers." - Harvard Business Review, An Inconvenient Truth About ESG Investing, March 2022. 

The fourth and last thing to know is that ESG is an enormous fraud. One that is starting to unravel. Both ESG and DEI are flawed concepts destined for failure because they were invented by buffoons, fail certain tests like common sense and are institutionalized rackets. So there's that. However, I fully recognize that when college majors are developed in a particular area of specialization that really have no social value but serve to raise university enrollment and profits, as well as boast participation and graduation statistics in areas of study beyond the hard sciences (Science, Technology, Engineering and Math), it's imperative to manufacture jobs to be ready to receive those graduates

If pinning social credit scores to companies was a legitimate and useful idea, it would have been invented before now, and not just because so many evolved Millennials are now entering the management ranks of corporate America, pushing out Neanderthal Boomers and GenX, and have run out of useless job openings in the traditional HR Department. ESG necessitates inventing new jobs to avoid doing productive work that improves society during regular business hours.

Until the idea that "companies will make more money if they simply adhere to my personal opinions" dies - and make no mistake, it will be a humorous footnote in the history of stock market investing- ESG will continue to run roughshod over and pollute true securities analysis, while continuing to careen and dodder back and forth between social justice and fascist bullying (depending on the party in power) as it searches in vain for an anchor that can define "what it should really be measuring" (Hint: shameless bootlicking and political whoring) until it collapses in on it's glaring deficiencies, solipsistic navel-gazing and grotesque corpulence (like a white dwarf.)

I originally wanted to tell you how I really feel, but decided it would be more prudent to start off a little more dispassionate.

Wall Street's Newest Grift

As crypto has begun its inevitable scripted decent into irrelevancy, Wall Street is moving towards ESG as it's next big profit center. This all reminds me of Matt Taibbi opening line in his famous 2010 article titled The Great American Bubble Machine, excoriating Goldman Sachs' role in the Great Financial Crisis (GFC) of 2008-09 as follows:  

"The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money."

Man, that's my kind of opening. Way more efficient than my summary above. A world without GenX cynicism is a world I don't want to live in.

Taibbi then follows with a ruthless and comprehensive literary takedown masterpiece for the ages (one that I believe all investors should consider a must-read), documenting conclusively Goldman's role in engineering "every major market manipulation since the Great Depression." What I've always found erudite about the piece is how well it lays out in simple terms how Wall Street investment banks rigged markets (including the classic and consistent high-stakes parlor trick of yanking the rug out on a new generation of investors roughly every 7-10 years. Kinda' like our current market correction...)

An Idea Who's Time Has Come 

If you are unfamiliar with ESG, a.) congratulations,  and b.) in my estimation, ESG is arguably one of the biggest and most recent scams in finance, and it's been perpetuated by at most about a dozen investment bankers that may control significant swaths of the stock market. As heads of some of the largest mutual funds (think Fidelity, Blackrock, Vanguard), these extraordinarily wealthy individuals control the fund companies that manage the mutual funds and Exchange Traded Funds (ETFs) that largely control the most important decisions at the majority of the largest companies in the world. Which means they control the economy and the world, so this is not an insignificant situation. When contributing to a mutual fund, most investors (happily and usually unknowingly) transfer their proxy voting privileges to them as well. And in my experience, exactly zero percent of my clients care even three squirts of a cow's utter about losing this privilege. Even explaining to them what they're losing is usually wasted breath, like accepting the Apple user agreement. But they should care. 

You see, when buying a share of stock in a company, you usually become an owner. And that ownership entitles you to a single vote at their annual shareholder meeting. When you own a mutual fund that owns a share- depending on the size of your investment in the fund- you might own a small fraction of a share in each of the companies it invests its assets into. So by default, mutual fund investors are (very) small owners in the companies that the funds select.

The nature of mutual funds means that your use of the mutual fund typically transfers your miniscule ownership in the component stocks to the fund company. Each individual investor's share of ownership is relatively small, but when combined from all investor contributions into the fund (i.e. the reason they're called 'mutual funds'), the fund company now controls a significant amount of proxy votes. And that in turn gives them significant control of the individual companies themselves. Which in turn gives them significant control of the American economy, which is turn gives them control of the country.

Perhaps you can start to identify the problem.

As investors have piled into these funds over the past 13 years during an unprecedented, easy-money, buy-the-dip stock market bull rally, true control over these companies has transitioned from individual investors to the fund companies themselves. Or more accurately, the managers of these fund companies. Through their control of the largest mutual fund companies in the world, which control the largest funds in the world, which control the largest companies in the world, the managers of these companies become the largest shareholders and can then dictate how the fund company votes, which dictates how the companies are run.

Needless to say, the leaders of the fund companies are now some of the most influential investors in the world. This makes them some of the most powerful people in the world, because even though managers have boards of directors and shareholders of their own to answer to, most managers - especially of well-run and very profitable firms- operate somewhat autonomously and with few limitations (like Elon Musk at Tesla and Tim Cook at Apple.) They are highly-regarded and hold enormous sway.

In a world where justice is disappearing at a rapid pace (or at least rigged for the benefit of the chosen few elite - think Jussie Smollett, Michael Sussman and Paul Pelosi), these people do what they want. The regulators aren't smart nor courageous enough to go after them, and with the economy moving more towards a version of fascism than a free market, those elite of a certain political persuasion are in effect above the law because they own the Congress and are therefore also protected by the federal intelligence community (DOJ, FBI, CIA, DHS, INS, DEA, ATF, FJB, etc.) and the legacy media. Compare the fates of Roger Stone and Peter Navarro to Eric Holder and Christopher Steele and you soon discover the very essence of the golden rule: "He who holds the gold, makes the rules."

That's a harsh indictment but easy to prove. It admittedly sounds a little morbid and depressing, but a.) welcome to my world and b.) it's imperative to understand this dynamic when considering the impact of ESG on the stock market and whether it's a good option for the individual investor.

The important point to consider is that the power held by the largest mutual fund companies is immense, so much so that even legendary investor, John Bogle- who founded Vanguard, launched the lost-cost investing revolution that we all now take for granted and who changed the world of investing more than any other human in the past century- publicly expressed alarm at what could amount to a consolidation of power within the top bosses of these firms. He noted that this control was impressive, staggering and could be dangerous to the free market and capitalism itself. It's insidious. And now they want to dump this garbage into 401ks.

If these individuals were to ever band together to decide that they would only allow investments in companies that (hypothetically): have rainbows in their logos during Gay Pride month, have commercials with only biracial couples, or contribute to a certain political party, that would in effect be a "sanction" of sorts (similar to the US response to Russian aggression in Ukraine), which would block capital investment into these companies, isolate and ostracize them.

"Three index fund managers dominate the field with a collective 81% share of index fund assets: Vanguard has a 51% share; BlackRock, 21%; and State Street Global, 9% ... It seems only a matter of time until index mutual funds cross the 50% [share of corporate ownership by index funds] mark. If that were to happen, the “Big Three” might own 30% or more of the U.S. stock market—effective control. I do not believe that such concentration would serve the national interest." - John Bogle, Wall Street Journal, Nov. 29, 2018

As one can imagine, it hasn't taken long for companies like Vanguard and Blackrock to realize that by personally directing the vast majority of investor money nationwide through their mutual funds into the companies that they invest in, they can control them. So when they decided ESG should be a new moneymaker (like crypto), Wall Street dictated that all companies that wished to receive their money must adhere to their personal opinions and whims on such controversial and hotly-charged issues like social justice and climate change. As a result, this created a massive investment distortion in capital markets that has starved a lot of good, viable companies out of significant investment.

If companies didn't achieve sufficiently high ESG scores (which are decided upon by whomever makes that decision, kinda like the credit agencies and the China social credit systems), then they would not be eligible for any investment whatsoever from the world's largest mutual funds. Which would be like denying you water and air. As you can imagine, this institutional con has targeted and certainly includes energy companies like Exxon and Shell that make modern life livable (since only 44% of petroleum is used in vehicle/ transportation and the remainder used for other forms of fuel and as well as components of devices like the one you are reading this article on and almost every other physical entity in the room you are sitting in now.) 

I may have failed to mention before, but it's really hard to run a company of any size in this country in the 21st century. Think of the average job. Then imagine if it was 20x more difficult and stressful and add 3-4 hours of work each day in the office. And that's only what it's like on federal holidays like Juneteenth when the phone's not ringing off the hook with pissed off clients looking for someone to blame. (Or any other holiday. Federal employees get 44 paid days off per year. In addition to 104 days off on weekends. That's almost 150 days off. Out of 365.) If you think that's fair, give me a call.

Annnnyways, my point is that being a business owner is really hard. It's even harder to manage a larger firm with lunatics people working for you, and most businesses have become even more challenging to manage in the last few years after the government made it illegal to work for all but the most politically well-connected- like Amazon, Target and Best Buy. And even they had their problems with customers breaking in to them and stealing all of their merchandise, which far exceeded the benefit of being a beneficiary of the federal government's attempt to make them monopolies during the pandemics by destroying small business. Only for Fauci to get COVID this week. At age 81. And live. Oops

Only in government can you be so wrong and do so much damage and still keep your job. If I have a bad quarter, I'm looking at bankruptcy and financial ruin. America, what a country....

So in addition to the myriad responsibilities of running a large company in the United States, CEOs now get to enjoy being scrutinized through a completely contrived and arbitrary social scoring system that is managed by the Wall Street versions of "Karen in HR," untested, unreliable, wholly disconnected from what actually makes a company popular as an investment (profit) and subject to massive fraud and abuse. 

At this point, perhaps you're starting to see the problems with ESG. But if not, let me help you out...

First, it was basically impossible for ESG to have been introduced in the 20th century when market darlings like Exxon and Phillip Morris led the indexes and made enormous long-term profits. To have excluded them through a social scoring system (and many tried) would have adversely impacted, and more likely crippled, the market performance of any mutual fund adhering to an ESG strategy. In the 21st century, however, it's been a different story as Big Tech has ascended to the throne and dominates all indexes.

Apple, Google, Amazon, Microsoft and NetFlix are enormous heavyweights in the market, filled to the brim with bright, young Millennials and all extremely woke. So it's now easy for a fund or investor to promote ESG scoring and still make money. This solidifies their control and access to capital, which in turn solidifies their control over the Congress and therefore the country. So now you can start to see how an unholy alliance can quickly form around government bureaucrats, Big Tech billionaires, and the dangerous whims of mutual fund manages like the infamous Larry Fink, an extreme ideologue who looks like a movie villain with matching visions of world domination who has made numerous public dictates to America's CEOs that they will adhere to his extreme politics and ESG fantasies or else

As power consolidates, it always often turns abusive. And Larry Fink is not an isolated case. You know if The Washington Post is concerned about corruption, then it's serious.

"We have a new bunch of emperors, and they’re the people who vote the shares in the index funds. . . . I think the world of Larry Fink, but I’m not sure I want him to be my emperor.” - Charlie Munger, partner of Warren Buffett at Berkshire Hathaway

You may think that one man at one company is a small factor in the investing world, but when you observe nonsense like this from Blackrock (simply to score ESG points with some nebulous court of wokeness, an intelligent person becomes insulted and begins to understand how a ultra-progressive agenda in the hands of a few billionaires is not just bad for the country and the economy but also the markets. The actual introduction of these gimmicky, lowest-common-denominator marketing tactics aren't meant to help their target demographics but actually exploit and fleece them. If you're unable to make that connection, call me and we can walk through the last sixty years of benevolent government policy to ask "Qui Bono?" The effects and the neurological damage that such delusion causes to their sycophantic disciples who are so wedded to a political ideology that they eventually fall prey to the Mass Formation Psychosis that has infected our society. 

The market acumen of semipro basketball players is dubious at best, dangerous at worst. They'll be writing articles and book chapters about this kind of marketing in the coming years. Remember the E*Trade baby?  

Now, in an escalation absolutely no one could have seen coming, the ESG complex has graduated from intimidating and threatening specific companies to actually targeting individuals. And not only that, they have devised a way to attack one company based on the actions of another country. If that seems confusing, congratulations- you still have a functioning prefrontal cortex, there's still hope for you. In retaliation for Elon's Musk's bid to buy Twitter and take it private (an action which threatens the left's version of Brownshirts within BigTech from being able to control human thought), the ESG Index recently booted his other company, Tesla, from ESG qualification, citing claims of racial discrimination and crashes linked to its autopilot vehicles

That would be like the NBA barring LeBron James from competition for forcing his teenage daughter to close her OnlyFans account.

To give you some additional perspective on the validity of ESG, Apple is the largest member of the ESG index, representing an incredible 10%. This despite Apple's notorious and shameless record of supporting human rights abuses at its partner factories in China so bad that they make Saudi Arabia recoil. The Foxconn facilities' claim to fame is the installation of 'body catching nets' on the outside of their buildings to catch all of their workers trying to kill themselves by jumping out of windows.... Apple and the China Communist Party (CCP), benevolent world citizens and posterchildren for ESG. 

“It’s not a good place for human beings,” says one of the young men, who goes by the name Xu. “It wouldn’t be Foxconn without people dying... Every year people kill themselves. They take it as a normal thing." 

At this point, do I even have to keep going?    

Yes, of course I do. There are still jokes to be told. And there are still people with IQs above room temperature still taking ESG carnies seriously.  

Far be it for me to explain how the cow ate the cabbage, but Elon Musk is the most ESG individual in the history of the world (and I'm hardly a fan). Not the year, and not the United States. The history of the world. He's the first and most successful African-American to run a major corporation in history, a fact you would think would garner more respect and press. And Tesla is the most ESG company in the history of the world (despite being terribly run). If Tesla is not ESG, then nothing is ESG. It's a word that has lost all meaning, like "racist" and "Nazi."

So for both Musk to be kicked out of the ESG club because of his personal beliefs and a refusal to sell his soul or deny reality, simply exposes the entire ESG movement as a complete farce. The entire ecosystem of cronies and sycophants continue on, acting out their roles like extras in Orwell's 1984 and reinforcing the persistent belief (in some circles) that neo-liberalism is a mental disorder masquerading as political ideology. Which is a perception you would think they'd be intent on jettisoning given the almost certain political annihilation they'll be suffering this coming November.

While I'm apolitical and thoroughly enjoying Musk's evisceration of the ESG hustle by stealing a page out of former President Trump's destruction of the media 2016-2020 (perhaps his only lasting legacy), the lack of any sign of intelligence or morality in the ESG camp honestly surprises and saddens me. ESG absolutely could have been a legitimate movement and a genuine force for good for our country and the world, like Black Lives Matters, Occupy Wall Street and MeToo, all powerful forces with hollow cores that imploded in on themselves. Now ESG is just the latest stark remainder of the immense dangers of misguided, short-sided, fascist rackets. ESG has served to cripple the integrity of both Big Tech and government regulators. Once again proving that, "absolute power corrupts absolutely." 

Fortunately, the ESG graft appears to be nearing it's end. This is a positive development because it's not good for the market and it's not good for America. As Matt Taibbi ended his infamous article referenced above as follows:

"It’s not always easy to accept the reality of what we now routinely allow these people to get away with; there’s a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can’t really register the fact that you’re no longer a citizen of a thriving first-world democracy, that you’re no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.

But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going."

Taibbi could have been talking about the Lords of ESG.

Environmental and Social Governance may not move to the dustbin of history today or even this year. It may even take a crisis to finally expose its inefficacy and fraudulence. But someday even dumb people will understand that adherence to their flawed woke agenda is mutually-exclusive and counter-productive to the mission of any corporation, and as such its objectives are impractical, foolish and delegitimizing. But until such time that a significant portion of the investing public understands this and responds accordingly, my advice is to steer clear of anything that attempts to combine subjective political criteria with business profits. To do otherwise is to believe that the survival of a corporation can and should be subject to the political whims of another corporation and individuals with fringe political agendas. And there's just not much evidence of that being successful in the history of the stock market.

If you hear someone promoting ESG around you, grab your wallet and back out of the room. Because it's a con and someone's about to get fleeced.