How ESG Went From a Sound Investment Strategy to a Wall Street Scam

I get this question a lot…

Is ESG a scam?

Well, the answer to that question isn’t so simple.

You see, the basic fundamentals of ESG, which stands for “environmental, social, and governance,” do not represent a scam.

To be honest, the whole concept is actually quite dull as ESG investing is simply an investment strategy that takes those three factors into account when screening potential investments. Theoretically, they’re little more than voluntary standards that could be used or not used. It’s fairly benign.

In fact, there are a number of funds, retirement plans, and companies that have been using these standards for decades. They just never called them ESG. They’ve just been accepted as basic factors that figure into a scrutinous investment analysis.

For instance, take the “governance” part, which includes things like transparency, leadership accountability, and anti-bribery and corruption indicators — all valid components of any investment analysis that if left unchecked could result in severe losses and financial damages.

Consider the Volkswagen emissions tests scandal, which ended up costing the carmaker more than $20 billion in fines while losing more than $100 billion of its market cap… 

Or WeWork, where there was no leadership accountability or oversight. There were also massive conflicts of interests left completely unchecked.

On a bigger scale, because of lack of oversight, transparency, and leadership accountability, consider the damage done by Enron in 2001, which absolutely crushed investors, or Lehman Brothers in 2008, which actually shook the core of the global economy.

Acknowledging “governance” in any investment analysis is standard.

So no — fundamentally, there’s nothing shady about analyzing environmental, social, or governance risk.

Unfortunately, ESG became sketchy when it was hijacked by Wall Street, moral do-gooder politicians, and companies that realized they could leverage the ESG “brand” to hustle a few extra dollars.

Take the recent “ESG bonds” that Toyota announced in early July.

As reported by Bloomberg, the Japanese automaker priced $1.5 billion of “sustainability bonds,” with the longest portion of the offering being a 10-year security yielding 1.08 percentage points above Treasures. 

Toyota is calling the bonds “woven planet bonds,” which it says will help fund projects that range from the development and manufacturing of battery electric vehicles to renewable energy projects like solar and wind.

Of course, my question after reading that was what the hell is a "woven planet'"bond?

I’ve been doing this for nearly 30 years, and I’ve never heard that term before. 

So I sifted through the SEC filing to figure it out.

Check this out:

I would’ve loved to have been the marketer who came up with that line of drivel.

What a load of nonsense — especially when you consider that Toyota has long put off transitioning its fleet to electric and even took a giant crap on the whole electric vehicle movement just a few years ago. Now it realizes it has to quickly catch up, so it’s waving the ESG flag to earn some quick cash. 

Understand, I’m not criticizing Toyota for taking advantage of the ESG brand. It’s smart, actually. But this kind of branding is exactly why the concept of ESG has gone from little more than basic analysis to the latest Wall Street con.

While Toyota — which is only now getting on the electric vehicle wagon — is pitching ESG bonds, just last year, Tesla, which started the whole electric vehicle revolution, got shitcanned from the S&P 500 ESG Index.

It’s all smoke and mirrors, my friend — smoke and mirrors.

That's a shame because now fiduciaries who have always considered ESG factors (but never referred to them as such) have to worry about some politicians going after them for considering things like how climate change poses significant risks to insurance companies or how companies with histories of sexual harassment could risk billions in lawsuits.

Imagine investing in a fund that has a risk analysis team that can’t highlight a billion-dollar risk to investors.

You know, Deloitte actually did an economic analysis on this back in 2018 and found that sexual harassment results in $2.6 billion in lost productivity. That’s billion with a B.

Then consider the lawsuits, which in some cases can result in tens of millions of dollars in damages, like the Fox News Roger Ailes sexual harassment lawsuit, which cost 21st Century Fox $20 million.

As far as I’m concerned, it is absolutely necessary for a fiduciary to investigate potential losses that could stem from corporate cultures that trivialize or even ignore sexual harassment in the workplace. 

You don’t need to wave an ESG banner to know that sexual harassment is a risk factor worth serious scrutiny.

And at the same time, to suggest that Toyota is embracing sustainability or “ethical investing” because it’s calling its bonds sustainable, ESG, or “woven planet” is absolutely absurd. 

So yes, while ESG risk analysis is absolutely sound, slapping the ESG brand on some bonds to impress overzealous environmentalists and far-left policymakers is nothing more than an ESG hustle. 

And for the record, while Toyota will certainly make a lot of cash in the EV game, it’s unlikely the company will ever catch up to the likes of Tesla, GM, or even this new EV startup that’s now producing an electric car that gets 1,000 miles on a single charge.

You read that right — 1,000 miles on just one charge.

And it never needed to raise a single penny from a manufactured ESG bond.

That car will actually be hitting the road later this year, by the way. You can read more about that one here.

To a new way of life and a new generation of wealth…

Jeff Siegel

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Jeff is the founder and managing editor of Green Chip Stocks. For more on Jeff, go to his editor’s page.

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