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Comment by dragontamer | Hacker News Reader

Its almost like we need to have an organization of investors who think about corporate governance issues. Maybe we can call these "G" investors.

But G investors won't be very strong as a block on their own. There's a large block of environmentalists (maybe call them "E" investors), and another block of people who care about social issues (call them "S" investors?).

Then people can get together in one big, ESG, block, to try to make sure that modern companies think about environmental, societal, and corporate governance issues.

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ESG has plenty of faults mind you. But the methodology to organize our money into blocks that focus on these issues is sound. We just need to come up with a better governance issue for ESG itself.

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This [1] is a long video, but it's worth a watch (or at least the first 20-30 first minutes).

I was once also convinced that ESG would make a difference. But this exposé by Aswath and the results of deploying "ESG" so far have proven that this concept is worse than worthless, but instead plain harmful (the video goes in details about this; e.g. you can package the most harmful activities behind some kind of ESG principle).

[1] https://www.youtube.com/watch?v=bOlzLRdLq5Q

I think ESG will actually shift the balance of power towards CEO's and away from shareholders.

If the CEO only has one job and that is to make profits for shareholders that is a single measurable benchmark the shareholders can hold him accountable to. But now the CEO can make whatever decision he would like and use nebulous and hard to track ESG goals to justify it.

> use nebulous and hard to track ESG goals

Well, that's where ESG is going by the wayside. But that's the nature of working as a block, there's so many constituents here our voices get watered down. But "as a block", our money is much larger together.

ESG has proven that it is possible to create these pools of money that tries to think about these issues. Moving forward, ESG investors (and ESG managers) need to be more clear on what those goals are and who to reward, and how to balance profits vs social good.

> If the CEO only has one job and that is to make profits for shareholders that is a single measurable benchmark

That's never been true, though, and arguably for good reason. The CEO is supposed to act in the best interests of the company, which may not be ideal for short term profit. Trying to simplify to that metric is likely to make the bad behavior even worse.

> The CEO is supposed to act in the best interests of the company, which may not be ideal for short term profit.

You're the one who added "short term" to profit.

The CEO is supposed to maximize the discounted future earnings of the company.

Sure but under the guise of "long-term profits" you can justify almost anything.

For example, you could say "we need to beat climate change, otherwise there won't be any profits on a dead earth".

> Sure but under the guise of "long-term profits" you can justify almost anything.

That's why the metric is discounted future earnings. So that you can't "justify almost anything".

True, I did add those words. Because "long term profit" is not a hard metric that can be defined, it's identical to "best interest of the company."

The goal of a company is to listen to its shareholders. And shareholders _usually_ care about long term profits.

But a group of investors, calling themselves ESG, are now caring about ESG issues. If ESG investors grab hold of your company's shares and become the owner of the company, it becomes the company's responsibility to listen to the (now ESG-aligned) shareholders.

Its mutually beneficial. ESG has enough money that its worth pursuing their money. And ESG is a vague enough political concept that the pool of investors is rather large in practice. Yeah, people like to make fun of how stupid the metrics are and all that, but... vagueness is kinda the point. They're trying to be as large as possible so that ESG issues can even come up in board meetings.

What are the differences between ESG and the Social Credit System of the People's Rebublic of China?

As an investor, you can choose to buy an ESG fund, or a normal fund.

The normal fund won't care about ESG at all and your money will go to all kinds of different companies.

The ESG fund will market itself as ESG. You probably should read up on the benchmarks that the fund cares about.

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Ex: iShares ESG Aware MSCI USA ETF (ESGU) fund. You can buy it, or not buy it. ESG isn't about getting "all" the investors involved. Its just about collecting enough investors together that the pool of money becomes a feasible corporate-politics entity.

Besides the fact that they're completely different concepts, one applies to corporations, which are not people, and one applies to people, which are not corporations.

No, the social credit system is mainly focused on businesses https://en.wikipedia.org/wiki/Social_Credit_System . As I understand, social trustworthiness affects their eligibilty for credit.

How are they at all the same in any way?

This doesn't really address the point. A block of organized investors puts pressure, but if stock owners can only cast non-binding votes, companies can just ignore the ESG votes and pay the execs whatever the execs want.

I don't think you get how or why ESG works.

When Blackrock makes an ESG fund, they'll look at governance issues like "Oh, Netflix has crappy governance", and then refuse to give them any money. ESG-funds focus on funds that have good environmental/social/governance records.

If anyone wants ESG-money, they have to match the baseline requirements of ESG-investors and what ESG-funds will offer. Otherwise, you don't get our money.

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The other reason why ESG works, is this "G" issue. Companies that care about shareholders will, on the average, return more money back to shareholders over the long run.

Companies like Netflix who hoard power to themselves and overpay their C-suite are obviously wasting money anyway, and therefore make for crappy investments. "G", theoretically, is just a good idea for investors to think about _anyway_.

AKA: If Netflix are a bunch of assholes, no biggie. I can invest into Disney instead, who has a much better G/Governance structure. And Disney+ is kinda kicking Netflix's ass right now anyway, so I think there's a good chance I'd make more money.

If Netflix wants my investment money (or the investment money of anyone else in the ESG group/fund I'm part of), they'll need to fix their G/Governance issues. If for nothing else, for more fair compensation of their C-suite.

Ah, I see how it applies. It does make me wonder why non-esg large fund investors wouldn't care about this type of control as well?

I also think there's some inherent conflict in the S part of ESG investing. i.e. a truly socially responsible company would be returning most of its earning to the workers who actually did the work that earned that money, rather than funneling it to shareholders. Which makes those companies a bad investment, which means ESG funds that extended their S goals that far will fail and ESG funds that don't will get good returns for their investors and continue on - so by definition the S goal is limited.

> It does make me wonder why non-esg large fund investors wouldn't care about this type of control as well?

The main thing investors have been focused on in the last 30 to 40 years has been lowering fees, in particular "passive" investing which is based on very obvious metrics ahead-of-time.

"Active" investors may have cared about these governance issues before, but their fees were just too high in practice. But I think we're seeing the blowback now as more-and-more companies come out with crap governance structures, knowing that they can take advantage of the easy-money from passive investors.

I don't know if things will swing the other way. But ESG seems like a way to keep fees low but still have a degree of thought put into corporate politics.

I'm not "bullish" on ESG btw. But I think its a step in the right direction, and I think that its a good thing that people are thinking about how to solve the issues that arose from this era of passive investing. Whether or not ESG truly solves the problem remains to be seen however.

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