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ESG: The Law of Unintended Consequences

ESG: The Law of Unintended Consequences

July 08, 2022

The sudden movement in 2021 within the investing community to Environmental, Social and Governance (ESG) metrics may be bringing about some very unfortunate side effects. Regardless of your stance on climate change and the urgency with which it must be tackled, the world's energy supply is not ready for a shift to 100% renewable energy sources. The grid is not ready for an all-electric vehicle marketplace. Prior to the pandemic, the world used about 98 million barrels of oil a day. We can’t go off fossil fuels overnight or even eight years as the UN Climate Sustainability Agenda would like.

But the sudden move in ESG investing is doing something to energy prices that is making life today very difficult for most middle- and lower-class people. It’s driving up the cost of energy significantly, now!

Companies like Vanguard, Blackrock and State Street Global, along with index firms like S&P are designing the framework for an ESG world. They are defining what it means as a company to be ESG friendly. They are pushing firm using their proxy votes to de-invest in fossil fuels. Whether that is acting as a fiduciary or not is an article for a different day, but it has consequences. The three largest investment firms are creating a shareholder dilemma know as The Spector of The Big Three. That is outsized control over the boards of publicly traded companies. This has put the large money managers potentially in the driver’s seat for social and political change. We can argue whether that is their job later, but we must understand the potential consequences.

The amount of investment in fossil fuel has taken a precipitous drop in the last few years. Add to this the sudden shift initiated by the Business Roundtable (an influential business lobbying association in Washington DC whose membership is all CEOs of major corporations) in re-defining “shareholder” capitalism to “stakeholder” capitalism. So instead of operating to generate maximum profit for the owners of the company within the framework of societal norms, companies should operate for the society first and in equal benefit to all stakeholders which can be vastly defined to even the world writ large.

We must be careful to understand the current ramifications of the world that is currently being constructed. Visa and Mastercard have begun designing ESG scoring for individual consumer credit card transactions. There is a movement for carbon footprint labeling for the food manufacturing and food service industry.

You may agree with this movement, but you need to also recognize the potential to distort and alter the free marketplace and even the return on investment of your investments and our economies.

It can have very bad unintended consequences.

Bryan D. Beatty, CFP® AIF® 
Financial Planner / Partner 
Egan, Berger & Weiner, LLC 

The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.