Viewpoint : Purpose instead of governance - against the nonsense of standardized ESG criteria
Sustainability standards are supposed to make business better. But successful examples like Tesla might not even have existed with such strict rules.
It seems that the investment industry has finally realized that serious allocation of capital goes beyond short-term financial gains. The increased focus on steering investments into sustainable companies with effective environmental, social and governance principles is intended to help stop climate change and - it doesn't get any smaller than this - make the world a better place. This is what the now familiar acronyms such as ESG and SDG (Sustainable Development Goals of the UN) stand for. So far, so good. The giant tanker is changing course.
But in the concrete implementation of how the financial industry and its regulators are now trying to fulfill this mandate, tragic aberrations are emerging. Genuine long-term impacts for the good of economies, societies, and the planet cannot be anchored in the dictates and banal metrics of ESG dogmatists. Yet they have gained influence - unwarranted.
Tesla violates ESG mandates
Let me try to illustrate with an example. Baillie Gifford has long been a large shareholder in Tesla. It's certainly indisputable that Elon Musk has steered the automotive industry in an increasingly sustainable direction. Not just because he himself is replacing the internal combustion engine in cars, but because he has forced change in an initially unwilling industry. Without Tesla, this transformation to CO2-free mobility would have been later and slower. That would have been fatal for all of us - and yet a look at relevant ratings would probably give me a different result, because Tesla violates many of the standard metrics used to assess a company's ESG credibility. Looking at things like the composition of its board, its executive compensation system, its run-ins with the SEC regulator, and the Twitter antics of its CEO, Tesla is not a company that makes the hearts of proxy advisors and ESG dogmatists beat faster.
I think such concerns here are dangerous nonsense. If we must measure anything, the relevant number for judging Tesla is not its own CO2 emissions, for example, or even the emissions avoided by its electric motors or the deaths avoided thanks to reduced pollution. Rather, it's the total benefit of all electric vehicles produced across the automotive industry - from GM to VW. Because Tesla forced change, and in doing so, changed the world for the better. That's its real contribution.
Willingness to be unreasonable
And I don't think Tesla would have been able to do this if it had been a "normal" company that followed its practiced codes of governance. Would a "normal" board of directors have risked everything for a revolution in mobility? After all, its failure was far more than a mere hypothesis in the beginning. Would a "normal" CEO have survived the many moments of controversy? Would "normal" investors have withstood the pressure of the short-sellers?
I doubt all of the above. Now Tesla may be an extreme example. But aren't all companies that go beyond mediocrity inherently unreasonable? Progress depends on radical thinking and impatience with conventions and constraints. To quote Noubar Afeyan, chairman of Moderna, "We have to be willing to engage with unreasonable proposals and unreasonable people in order to make extraordinary discoveries, because the idea that perfectly reasonable people doing perfectly reasonable things will make great breakthroughs is not comprehensible to me."
Supporting the ideas that may seem unreasonable at first glance, but have the potential to have a positive impact on society - that's our job as investors. But the number of companies that truly have the ability to change the world for the better is vanishingly small. And only a few of them will also add value for investors. Once they are discovered, we must continue to promote and challenge these companies. It is a source of pride that we have supported Tesla's vision and freed Illumina from the clutches of Roche and its hostile intentions.
Damage to ESG targets
To sum it up: It turns out that standardized ESG frameworks are not just gestures, not just ill-conceived constructs and distractions, but that in their totality they are deeply damaging to the transformation of companies - and ultimately the world - for the better. If we believe we must enforce a standard template for all companies in all industries and in all countries, we will end up with a dry, unimaginative, fearful, and rulebook-driven world.
Tolstoy claimed in his "Anna Karenina," "All happy families resemble each other, but every unhappy family is unhappy in its own way." In business, the opposite is true. Unhappy businesses resemble each other, but every successful business is successful in its own way. Business success depends on doing things that others cannot do.
Regulators and rating agencies, on the other hand, try to quiz the diversity a company needs to be exceptional in ordinary multiple-choice boxes. What we need, however, is the courage to find our own less-trodden paths to investment and social progress, rather than stubborn adherence to questionable and superficial benchmarks set by others.
