Daniela Gabor on the Critical Case Against Private Sector ESG

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

Joe, how many ESG press releases do you get in a day? What do you say?

Joe Weisenthal (0:23)

All, half of my inbox.

I don't like making fun of PR people too much because it's sort of cheap. Journalists always wind about PR people. But half of my inbox is cryptocurrencies, experts who want to tell me about cryptocurrencies, and the other is people who want to tell me about some sort of thing with sustainable investing, aka ESG.

Tracy Alloway (0:45)

Yeah, I kind of love how it's two extremes of the barbell, right? It's cryptocurrencies taking up a bunch of electricity and then at the other end, sustainable finance. But I wouldn't necessarily blame the PR people because there is this huge industry that has cropped up and grown around ESG. For those that don't know, it stands for environmental, social and corporate governance. And I think we've had something like $500 billion worth of money raised by companies and governments.

For ESG projects, we've had more than 800 billion flowing into ESG funds. And as our inboxes can attest to, we've had hundreds of new ESG funds launched recently.

Joe Weisenthal (1:35)

There is certainly a lot of money in it. And you're right, we can't blame the PR people. It's not their fault that there is just so much money, marketing, funds.

They're just going where, doing what the clients say, it's really not the PR people's fault. There is a very big push behind all things ESG, both of the private side, companies wanting to make themselves eligible for ESG, investing, green bonds, et cetera, just a huge part of this sort of a finance conversation right now.

Tracy Alloway (2:04)

Yeah, but I'm kind of glad you brought up the cryptocurrency parallel, because just like the crypto market, ESG is relatively new, and it's sort of finding its footing.

And there's been quite a lot of talk about how to align incentives, how to get definitions right, what exactly is a green investment. And in many ways, there's a lot of disagreement, and it's still kind of like the Wild West.

Joe Weisenthal (2:32)

Totally, and you know, there's still like, there's a lot of ambiguity, it seems like. I mean, part of it is like, well, how much you want to invest with your values? How much is it that using certain ESG screens, you can actually do better? Because in theory, the company operating with more sustainable practices could or should, according to some practitioners, actually deliver better returns? What are the trade-offs?

But I don't think any of these answers are settled science by any stride.

Tracy Alloway (3:02)

No, but today, in order to offset all the press releases that are floating out there, we are going to be focusing on, I don't wanna say the downsides of ESG, but maybe areas of potential improvement. That's probably a good way of putting it.

And we are going to be speaking to Daniela Gabor. She's a professor of economics and macrofinance at UWE Bristol and also a very vocal critic of ESG on Twitter. Daniela, thanks so much for coming on.

Daniela Gabor (3:32)

Thank you for inviting me.

Tracy Alloway (3:35)

So I guess my first question is, what's the purpose of ESG? Because it sounds kind of obvious, like we're gonna pour a bunch of money into good or green projects that are going to change the world.

But is it that you're supposed to be investing in good companies? Or is it that you're investing in companies and then trying to engage with them to change their behavior?

Daniela Gabor (4:03)

So I would say that my interest in ESG comes from observing the broader political context in which ESG investment has a reason in which this wall of ESG funds that you just described has sort of come about. To describe the political context, I would like to start with a quote from a private equity lobbyist that was discussing the Biden infrastructure plan. And he said something along the lines of, this is a very traditional government in spending on infrastructure plan. It's like an old funded through the government approach. And what we were expecting was Biden to put private financing in the driving seat, to partner with private finance through public-private partnerships, and to tap into the huge pools of capital, particularly ESG capital standing by and looking for a sort of sustainable investments and sustainable projects.

And the way in which this complaint was framed, that Biden chose old style government investment instead of a partnership with private finance, signals to me the importance of thinking about the rise of ESG and what is the purpose, how should we think about its limitations through the lens of what I call macrofinance regimes, that is the configuration of policies and institutions used by governments, central banks and private finance to design the low carbon transition, that is the transition towards a low carbon economy. And I would guess since 2015, the year of the Paris Agreement and also the year of the Addis Abeba Financing for Development Conference, we have seen what I would describe as two broadly distinctive macrofinancial regimes that promise to generate investment in the order of about USD five to seven trillion annually that are necessary for the low carbon future. And there is a big finance regime and a big green state regime that we often discuss as a green, you deal kind of arrangement.