There is a surreal snake eating its tail ethereal ambience to this story. So let me start by saying I’m not making any of this up. You can verify every fact in this piece (unlike the WSJ op-ed piece I’ll be discussing). Let me also say that the intellectually shallow contortions of the anti-ESG crowd never cease to amaze me. Last bit of throat clearing before I get to the topic. I want to acknowledge my continuing indebtedness to them for the writing opportunities they provide for me.
The latest comes from an op-ed piece “Is ESG Profitable? The Numbers Don’t Lie” by Mike Edleson and Andy Puzder published on March 10 in the never-ESG-friendly The Wall Street Journal. Both men have very distinguished backgrounds (note how I provided links to verify this statement) and space does not allow me giving them the full recognition they deserve. So I’ll just focus on the bit that’s relevant here. Mr. Edleson is a director of 2ndVote Value Investments Inc., parent company of an investment-advisory firm that licenses 2ndVote Analytics’s scores. Mr. Puzder is chairman of 2ndVote Value Investments and a senior fellow of the very conservative Heritage Foundation.
In the spirit of transparency, I acknowledge that I’ve never heard of Mr. Edleson so have no priors about him. I have heard of Mr. Puzder. I don’t know much about him, but his name keeps popping up as one of the thought leaders of the anti-ESG movement. Take, for example, this entertaining video “ESG Investing is an Attack on the Free Market.” For more politically motivated anti-ESG rant check out “Heritage Explains the ESG Pushback” which warns us that “Under the umbrella of Environmental, Social, and Governance (ESG) activism, corporations have become unimaginably woke.“ Italics theirs.
I’m constantly struggling to understand what being woke is other than it being a synonym for liberal or progressive—essentially name calling on the right. Thus I simply don’t have the imagination to conceive of it becoming unimaginable. But I am intrigued by their strategy of saving our free markets by making them less free. I pointed this out in the model legislation “Eliminate Political Boycotts Act” developed by the American Legislative Exchange Council. Which their board turned down so, sadly, that lovely page on their website explaining the act no longer exists.
The op-ed piece begins with the usual anti-ESG sleight of hand redefinition conjuring trick: “Capitalists invest money, and manage companies, to do well financially. Proponents of so-called woke capitalism claim that companies can do well’ financially by doing ‘good’ politically. The idea is that advancing a political agenda will also enhance profits and shareholder returns.” I’m feeling like a boring and broken record here in saying that ESG is about material risk factors that matter to value creation. Like in “Rescuing ESG from the Culture Wars” which I wrote with my GOP buddy Dan Crowley. ESG isn’t a political agenda of the left. It is the right who is very successfully making it a political agenda in hopes of firing up their base.
The opening paragraph continues, “Whether this does good is a matter of opinion, but whether it does well can be measured.” They then present an analysis which purports to show that politically neutral companies perform better than other ones and ESG funds. Based on their methodology (more on this below) they note that “On average, roughly a quarter (or 221) of the S&P 900 large/mid-cap companies studied scored 3—taking no political or social stance on any of these six issues—during the period from June 30, 2021 (when the data was first available), through Jan. 31, 2023.” We’re talking 19 months of data here, hardly high quality rigorous research. They further note that, “Of the remaining companies, the political tilt was strongly to the left. More than 59% scored liberal, and under 15% conservative (with only one company higher than 4).” As I’ve noted before, this Woke Takeover of Corporate America has unimaginably occurred in a corporate community where 69 percent of the top five executives in the S&P 1500 are Republicans.
As an academic, I obviously appreciate empirical research. I’ve searched to find a formal paper on which this op-ed piece is based. One that explains in detail the theory, methodology, and calculations on which the thin op-ed piece is based. No luck. Turns out Mr. Edleson was an assistant finance professor at Harvard Business School (where he didn’t get tenure and I as a full professor 🐥) so he should know about SSRN. It’s a free website where academics and others can post working papers and studies. I couldn’t find one there Under His Name. In fact, I couldn’t find anything by him at all. And in case you’re curious, I have 67 scholarly papers and 52,619 downloads. Praise be.
As an aside, on SSRN I did find a paper, “A Value Model For ESG – Proving That ESG Initiatives Can Be Profitable,” by Sree Sundaram and Arie Polichuk. They note that “All of the models, work and equations are able to the reader through a free template available on Valufy (https://valufy.net). See instructions on downloading Valufy and the ESG value model template in the appendix of the article.” Valufy is “is a free value model generator. It enables you to create quantifiable value propositions for most projects and initiatives.”
At this point I’m kinda stuck. I have a pro-ESG paper where I can verify (or not) their findings and an anti-ESG where I just have to take these guys’ word for it. What to do? I could stop here but it’s a Sunday and I’m in London on a business trip without my wife so lookin’ to kill some time. Since I can’t get my hands on their data, I decided to check out the place where it comes from, 2ndVote Analytics. And here the real fun began! What I found may not be unimaginably woke but it is unimaginably and hilariously ironic.
2ndVote Analytics is basically a giant ESG database. They use the eternal incantation “You can’t manage what you can’t measure” to note that “Every corporation is defined by its values – those intrinsic but often intangible variables that shape the way organizations think, act, associate, and motivate their culture. Translating those values into measurable functions of employee, community, partner, vendor, and even executive performance can be complex. This is where 2ndVote Analytics comes in.” Two points here. Note that they say “values,” not “value creation.” Fine by me. They just need to recognize that people have different values and shouldn’t be trying to impose theirs on others. And the “employee, community, partner, vendor” bit sounds a little bit woke to me.
But here’s where I got REALLY excited 🤗! Make sure you’re sitting down when you read something else they have to say. I want my readers to be reading in a “No Concussion” environment.
“It is time American companies took their pride back, took their values back, and returned to defending their values from forces inside and out (gosh, sounds scary) that threaten their success. It is time we take our traditions back. The supposed powers that be (if they’re supposed do they really exist?) would impose controls on you that are contrary to your values (how do they know what my values are?) and the interests of your shareholders and customers. We help you take that back on your terms (well, I do like getting things on my terms!). What some call ESG is really a globalist dissolution of stakeholder power. Let us help you take TrueESG™ back to your values.” So the word “values” (not value creation) is used in service of preventing “a globalist dissolution of shareholder power.” Gosh, thank you so much 🐥!
And how do they do this? Through Values-Driven 2V TrueESG™. I’m not kidding you. They’ve trademarked their own black box ESG scoring methodology which, to point out the obvious, is values-driven, not value-driven. (Penn Law School Professor Jill Fisch and I have pointed out the big differences between value-based investing and values-based investing.) Gotta love it with all the rant the right is making about ESG scores, like former Vice President Mike Pence in a letter to (where else?) the WSJ, analogizing them to “the social credit scores issued by the Chinese Communist Party” and telling us the unimaginably awful consequence that “a low ESG score can be devastating, making it virtually impossible for a company to raise capital—and that is exactly the point.”
The unimaginable irony continues. 2ndVote Analytics dutifully follows the basic ESG framework. (And the careful reader will be pleased to see that the image above is the same one in the WSJ op-ed piece!)
Environmental Stewardship
“Continuous Improvement in the sustainment and betterment of the physical environments in which organizations operate is the duty and opportunity of every organization.“
Last time I checked the Earth and its climate are part of the physical environment.
Social Leadership
“Value-based management of a company’s relationships with employees, suppliers, customers, and communities is essential to the lasting success of the culture they work so hard to create.”
Sounds suspiciously like stakeholder capitalism to me.
Governance Authenticity
“The integrity of corporate governance—both actual and perceived—is even more critical visibility and cyber-speed communications.”
To be honest, I have no idea what this sentence means but I’m intrigued by the idea of actual vs. perceived corporate governance.
Let me see if I’ve got this right. The organization that supplied the data for the paper ostensibly taking down ESG has created its own database organized in terms of ESG. Here’s how they do it. Each company gets a score on a five-point scale from Liberal (1) to Conservative (5). “2ndVote has developed our proprietary scoring methodology (italics mine) to integrate the individual issue scores into a meaningful composite score.” The aggregate scores are based on six issues: Life, Basic Freedoms, 2nd Amendment, Civil/Safe Society, Education, and Environment. They don’t explain the data sources and calculations for developing these six scores but it’s quite clear that conservative values are deeply embedded in their methodology. Which means these are not use scores for assessing a company’s material risk factors important for shareholder value creation.
2ndVote Analytics further notes that “Our methodology places greater weight on some issues than others. So, instead of calculating a simple average (adding up the six issue scores and dividing by six), we employ a geometric weighted average (GWA) overall score.” Very fancy! What this means is that some scores get more weights than others and I listed them in rank order from highest (Life) to lowest (Environment). They don’t explain the relative weights. They do note that “Averaging how well we support education with the taking of a life through abortion does not calculate equally.” The language here is telling. Since when are rating agencies supposed to have supporting causes as part of their business business proposition? And, unimaginable as this may be, this is what ESG critics are accusing ESG rating agencies as doing—forcing a liberal agenda down the throats of Republican controlled Corporate America.
But this is really a cause for them. “This GWA approach has two important features that more accurately assess a company’s support for foundational Judeo-Christian and American values, as defined by the six 2ndVote issues.” When it comes to having values infuse ESG ratings, the big ones always being attacked (like ISS, MSCI, and Sustainalytics) for their methodologies for determining material ESG risk factors pal in comparison.
To illustrate the shameless blending of conservative values with ostensibly unimaginably objective ESG ratings, check out Featured Content, starting with an Everyday Shopping Guide. Which is free! “Use our Everyday Shopping Guide to find the best retailers, restaurants, and more from the 2ndVote Top Picks List that are rated ‘Neutral” to ‘Conservative’ for choosing the best places for your business every day.” Nice. Let your political views inform the way you participate in the free markets. Ya gotta wonder what these folks would say about some liberal group giving a list of places to shop from. Oh, I don’t have to wonder. I know! I’ve been learning a lot from the right about boycotting. They’d say that liberals are boycotting conservative companies and interfering with our free markets.
Other Featured Content are Human Rights Campaign (subscription required), Good/Bad Actors (free!), United Way Guide (free!), Life Guide (free!), Southern Poverty Law Center (subscription required), Black Lives Matter (subscription required), Media (free!), and Railway Roundup (free!). Okay, I get it. The conservative stuff is free, but you have to pay to find out about the liberal stuff. Makes sense. Many conservatives will gladly pay for dirt on those pesky progressive liberals and if they want to find out what 2ndVote is saying about them well, they should pay for it!
Since Good/Bad Actors is free I checked it out. No fancy GWA stuff here. Just pure binary clarity about the good and the bad! They have a list of organizations under each of their six rating criteria. Only two organizations make the “Good” list for all six. One is the very conservative Cato Institute. Want to guess what the other one is…..? Bingo, you’re right! It’s The Heritage Foundation 😍. Nothing beats having a friendly ESG rating vendor who loves you providing data you can use for your cause. Owning the ESG libs!
Being more on the lib end myself, I was disappointed to see that not a single one of them made the cut for all six. The very liberal Center for American Progress hit five, missing out on Environment. The ACLU and YWCA (scratching my head on this one) managed to make the list on three. Neither the Business Roundtable or the Bipartisan Policy Center managed to be on the “Good” list for any category. They did get a participation medal for at least making it on the “Bad” list for Education. Finally, illustrating the strict homogeneity of their political philosophy, not a single organization scored as “Good” in one category and “Bad” in another.
One last thing before I meet some friends for tea. (Remember, I’m in London). For free you can also get company scores. I’m a little pressed for time so couldn’t gobble up a lot of them and there are so many companies I want to check out! I had to target my research. ExxonMobil, somewhat curiously described as a transportation company, gets a score of 1.81, exactly the same as Whole Foods. Not unimaginably liberal but still pretty liberal, don’t you think? To get the details you need to become a subscriber. Free only goes so far in free markets and that’s fair enough by me. But the price is good. Only $50 per year. Just might do that! And then I can find out what they’re saying about the libs.
In the meantime, I find these scores useful. Clearly no conservative banker should ever loan money to ExxonMobil or Whole Foods. Good thing they don’t need it. ExxonMobil has a market cap of $444 billion, making it the 12th highest company in the world by market cap. Whole Foods is owned by 5th ranked Amazon at $920 billion.
Oh, one last thing. Let’s give their study the benefit of the doubt since I’m a bit jet lagged. What they found is that values-based investing doesn’t pay, whether its conservative or liberal values. Makes sense to me since I’m all about using material ESG risk factors for value creation.