Business better sticking to its knitting

Business is getting back to business, where it belongs.

That might sound odd, but it goes to the heart of the problems created by too many companies embracing environment, social and governance (ESG) issues and forgetting why they exist and for whose benefit.

Last month, this column examined the shift away from ESG virtue signalling (‘Anti-ESG investing picking up steam’), but the theme of that piece has broadened significantly with three related developments.

The first event to kick the ESG debate further down the road was the criticism meted out to big businesses that funded one side of the recent referendum to change Australia’s constitution.

Even people who voted ‘yes’ for greater recognition for Indigenous Australians could see there was a problem with a business donating shareholder funds to a social cause, no matter how important, because it’s money that does not belong to management.

Next came news that one of the world’s biggest food makers, Unilever, is dumping policies aimed at giving its products a “social purpose”, a position best summed up by its recently replaced chief executive, Alan Jope, who said the company’s brands should stand for something more important than making your clothes whiter or your food tastier.

Examples include the marketing of the detergent Omo – one of the better known of Anglo-Dutch Unilever’s 400 brands – which is said be “tough on stains and kinder to our planet”, and Hellmann’s Mayonnaise, which is said to “make taste, not waste”.

Earlier this year, according to London’s Daily Telegraph newspaper, prominent British investor Terry Smith, said: “A company which feels it has to define the purpose of Hellmann’s mayonnaise has, in our view, clearly lost the plot”.

Unilever’s newly appointed chief executive, Hein Schumacher, got the message when he announced in October that the company was moving on from a policy of trying to “force fit all of its brands with a social purpose”.

But the killer blow on companies drifting too far down the blind ally of ESG alignment came from a professor of finance at New York University’s Sterm School of Business.

In a letter to the Financial Times newspaper, Aswath Damodaran said ESG had no place in business.

Under the headline ‘ESG is beyond redemption: may it RIP’, Professor Damodaran said the problems of investing within an ESG framework started with assessing exactly what it measured.

ESG started as a measure of “goodness”, he said, but marketing experts soon realised that goodness had limited selling power, so they changed gear to argue that ESG generated higher investment returns.

The investment argument soon faltered, leading to a claim that a high ESG score meant less risk. “The truth is that ESG scores today measure everything, consequently, they measure nothing,” Professor Damodaran wrote.

“Once you strip ESG of its good for value and good for investors arguments, the only argument left for it is that it’s good for society, and there, too, ESG is destined to fail.

“ESG pressures have led public-traded fossil fuel companies to reduce spending on exploration and to divest fossil fuel assets, but private equity has filled the investment void.

“Is it any surprise that after trillions of dollars invested in fighting climate change, we are just as dependent on fossil fuel now as a decade ago”.

As the man from Unilever might say, that’s food for thought.

Bet on black

THE fate of fossil fuels has also become a hot topic inside the oil and gas business, with an industry lobby group at loggerheads with its own members.

According to the International Energy Agency, demand for oil will halve by 2050 if governments stick to their promises to clean up the energy sector, adding that oil and gas investment was no longer safe or secure.

Two of the world’s biggest oil companies obviously do not agree with the IEA, with Exxon Mobil and Chevron having spent more than $US100 billion between them buying smaller rivals.

Chevron boss Mike Wirth dismissed the IEA prediction, saying it was “not remotely right”.

“We live in the real world, and have to allocate capital to meet world demands,” Mr Wirth said.

“Demand for oil will continue to grow to 2030 and beyond.”

Clearly there will be no virtue signalling from Chevron.