United Airlines has gone woke. Airlines are fighting over who can be the most environmentally-friendly. Delta even claimed to be carbon neutral before the pandemic, even though they literally own an oil refinery and most of it was dubious carbon offsets.
Expedia’s Chairman Barry Diller is bucking the trend dismissing ESG as virtue signaling at the Skift Global forum this week.
Expedia Group Inc. Chairman Barry Diller largely dismissed the inclusion of environmental, social and governance principles in corporate decision making, saying many such programs just produce “glossy reports.”
“Most of ESG is virtue signaling, I’m afraid,” Diller said Tuesday at the Skift Global Forum travel conference in New York. BlackRock Inc. Chief Executive Officer Larry Fink’s push for companies to become more sustainable was “above criticism” for several years, Diller said. But, while some ESG programs make sense, most of them are “truly empty calories.”
Ironically Expedia produces its own ‘global impact report’ and promotes booking sustainable tourism. Diller virtue signals! At the same time, Diller isn’t wrong about how many companies – and investors – behave.
Let’s look at this from the side of the investor looking to drive social causes with their dollars. The usual mechanism by which this works (and is more than virtue signaling!) is by lowering the cost of capital for ‘good’ companies (more investment, more money available and competition to make those funds available) by raising the cost of capital for ‘bad’ companies (with marginally fewer dollars available to them). However,
- ESG investing necessarily means giving up returns. If you exclude high return investments from your portfolio that are inconsistent with your guidelines, you will have lower returns. It’s easy to confuse environmental companies delivering good returns – and even the sector outperforming others – with environmental investing not incurring tradeoffs. Non-ESG funds can invest in ESG projects because they are likely to yield strong returns! The only investments that ESG funds can invest in and non-ESG funds won’t are the ones with lower expected returns.
- ESG investing leads to higher returns for non-ESG investors. That’s by definition, since it leaves profitable opportunities on the table for other rather than competing down those returns. It’s the mathematical flip side of raising the cost of capital for companies you deem bad actors! You should be fine with that, but recognize both that you’re giving up returns and helping raise the returns for other investors who don’t share your philosophy.
- How many ESG funds actually short non-ESG companies? How many even know how to calculate including a short in their metrics? But if they’re serious about raising the cost of capital for non-ESG projects shorting would be a necessary component of the strategy, and possibly even more effective.
- It can be possible to do more for environmental and social causes by earning more and donating rather than by imposing strict constraints on business activities. Giving up returns give sup the ability to invest in those causes.
Diller is the travel industry’s Dilbert, but he’s wealthy enough that he doesn’t need to worry about getting cancelled for it. I find this comic about ESG particularly interesting because it’s both offensively dismissive but also insightful into the cynical approach many companies take towards the issue.
— Chris (@JazzHandMeDowns) September 21, 2022
There’s nothing wrong with investing your principles. Doing so should cost you! And figuring out where to do so is hard, too, since companies – which are looking to market themselves to ESG-inclined investors – do the best job to position themselves as eligible for these funds. The metrics we use are both gameable and frequently gamed!
As an investor, outsourcing to an algorithm or generic investment fund isn’t likely to align with your goals, either. And pretending it’s all a free lunch is dangerous and silly.