Someone recently tweeted about the potential benefits of “Environmental, Social and Corporate Governance” as an investment tool, saying “Somebody should start a hedge fund that goes long anything with low ESG. and short everything with high ESG. Quite a few intuitive reasons that should work”. Indeed there are. And while (a) we are not giving investment advice and (b) such a fund sounds like a good idea to us, the main point is that (c) someone basically already did. It’s called a stock market. For centuries, in classic chaotic free society fashion, with many odd and even foolish events along the way, we have been separating the entrepreneurial sheep from the goats by giving money to things that work and withholding it from things that don’t.
Some readers may object that it’s not just the stock market, it’s the whole market economy. No matter how dazzling the prospectus, or seductive the advertising, the fundamental premise of the open society is that over time the good sense of the average person will reward what works and punish what does not. Even in politics. Despite the appalling choices often made at the ballot box by our opponents, and for that matter our friends, we believe that no system of government can possibly compare with that in which the populace has a veto over the actions and indeed incumbency of those in power.
By the same token, and despite the dismay we often feel at the contents of other people’s refrigerators, playlists or clothing drawers, our entire way of life is built on the premise that if you build a better mousetrap, the world will beat a path to your door. Again, not a direct path. Many people buy bad mousetraps, and good products and firms fail. But over time and on average, free choice winnows out the chaff and keeps the wheat.
It is true even of phenomena like ESG that are all the rage and seem to be taking over every firm of any size or importance. It has always been an open question how much of it is sincere and how much is just lip service, and even how much of the sincere stuff produced any actual change in behaviour, especially if it ran counter to the motive of maximizing sales, salaries and profits. But in a strange way it doesn’t matter, because if ESG works then the firms that adopt it will do better on average than those that do not and it will become dominant. And if it does not, if “Go woke, go broke” is a sound slogan (the Tweeter, Wei Zhang, was in fact commenting on a Tweet saying “Sri Lanka has a nearly perfect ESG score. It also has 55% inflation, a 50% reduction in crop yields, expanding poverty, fuel shortages and food riots. Go woke, go broke.”), the visible foot will remove those companies that do not heed the warning signs.
At this point an objection, or perhaps an object, comes whizzing at us from someone in the cheap seats keen to observe that this process only works if governments do not step in to obstruct it. Nimbly ducking the missile we agree entirely. If the state uses its power to divert resources from things that are working to those that are not, fewer things will work and people will be less well off in every conceivable dimension. (The same of course is true of political parties that suppress competition, subtly or brutally.) But even here there is a powerful countervailing mechanism.
Governments that “pick winners”, or rather try to, end up reducing the total wealth available including to them, and annoy voters. It takes a while to happen, and longer to be noticed and understood. But sooner or later events vindicate Margaret Thatcher’s aphorism that “The problem with socialism is that you eventually run out of other people’s money.”
In saying so we do not counsel complacency. A sufficiently determined government can do appalling harm before the inevitable collapse, even in a democracy and certainly in a tyranny like the former U.S.S.R. So the more we understand, appreciate and rely on the mechanisms of the market and the stock market the better.
People often do the reverse. In fact Canary Media just got on the bandwagon not only of “heat pumps” but of a proposed bill to subsidize them. After noting that “Heat pumps are the hot new thing in climatetech right now” it said “It turns out that the cost of manufacturing a two-way heat pump instead of a conventional air-conditioning unit is only a few hundred dollars per unit. What if the federal government incentivized manufacturers to make that simple switch?” But if they really are that much more efficient, why would it have to? And if not, why would it want to? It really is the old huckster’s joke about losing money on every sale but making it up in volume.
The market can be ignored. It can be contradicted. But over time it will not be denied. Indeed, as we noted on May 25 of this year, someone already has created a significant investment fund devoted to performance not virtue signaling, Vivek Ramaswamy’s Strive Asset Management.
It’s not a hedge fund exactly. And it’s not the only one. In markets, as in any healthy ecosystem, all sorts of entities proliferate, some common, some niche, some straightforward, some “hopeful monsters”, some successful and some failures for reasons good or bad. But in the end, the fittest survive. The fittest to contribute to the good life. And the more people like Stuart Kirk are driven from complacent firms, the more talent is available to the upstarts.
So yes, someone should create that fund. Someone has. And there’s a lot more where that came from.
As the Wall Street Journal reported a few days ago, ESG funds are only perform a little less well than standard S&P 500 funds, but their expense ratios are between 5 and 78 times higher than generic S&P 500 funds. If left alone, I would guess the ESG funds will be gone in a decade, and if not, their investors will be significantly less wealthy by retirement. Of course, they’ll then try to get the Government to get the S&P 500 fund investors to transfer some of their earnings to the stupid ones on invested in ESG funds…
"The government likes to pick winners. The problem is that losers are better at picking government." (Thomas Sowell?)