“So how is our ESG Score?” an employee asked at the companywide meeting last month. This was preceded by a question on the Diversity, Equity, and Inclusion (DEI) efforts of the company. And I’m sure many wondered - What is ESG? Let’s talk…
Black Mirror is a British TV anthology series detailing a dystopian near future where all the ways tech can go wrong, do go wrong. It was the kind of cheerful family fare you could find on Netflix before all of you sickos started watching Squid Games (seriously, what's wrong with you people?).
Season 3 begins with an episode called Nosedive. Nosedive chronicles the story of Lacie who is obsessed with her social score. Basically, everyone in society gives you a yelp review and the better your reviews are, the more of society is unlocked for you. Fun stuff! What could go wrong?
Lacie gets invited to a wedding that is going to do WONDERS for her social score! Surround yourself with people that have high social scores and get them to give you a positive review and your social score will go through the roof! But Lacie has, um, a bad day. And her interactions with people cause some negative reviews. And in a society where your social score opens doors it can just as easily close them. And Lacie's bad day spirals out of control to the point where she can't even get a car ride because no one will go near a person with a low social score. It is a no value proposition. In the end, her social score gets so low it gets her sent to prison.
Or at least that is how I remember the show going down... it's been a few years since I watched and my entertainment memories can fail me from time to time. Not a lot of cycles spent here remembering old TV shows. But if I did remember correctly… SPOILER ALERT! (did I do that correctly?)
At any rate the show is a good analogy on the dark side of social scores. On this show it was social interactions that were judged by everyone. It is a pretty decent episode and shows how something that, on its surface, seems to be good. Being nice to people should be rewarded. But the road to hell is paved with the best intentions.
If you decide to log in and watch, make sure you select Season 3 - Episode 1. Do not, under any circumstances, choose Season 1 - Episode 1. I'm NOT going to be held responsible if you make that mistake! I couldn't eat bacon for like 3 days after that horror show!
So what if we expanded that out to the government? What if the government was constantly watching your every move and could enforce a social credit score on you? Want to cross the street outside of a crosswalk? You can but if the cameras pick up this illegal action then maybe your credit card gets turned off? Or your electricity stops flowing for a day? It's big brother making sure all of society stays in check. And it is today's China. Heck, in many ways it is today's Canada!
Could it happen here in the USA? Of Course! And it is currently happening worldwide. Now.
Welcome to the brave new world of Environmental, Social, and Governance… or ESG for short. So let's go through the Cliff Notes version of how stakeholder capitalism is turning the world's corporate powers into uber-woke weapons.
What is stakeholder capitalism and ESG?
We’ll start with shareholder capitalism. In shareholder capitalism the corporation has a fiduciary duty to attempt to return profits on shareholder investments. If I have invested in Widget Corp, Widget Corp will do it’s best to ensure that their widgets are profitable. This ensures that I make money on my investments. If you invest in a 401k, you’d be well advised to invest in companies based on a shareholder capitalism model. This is how you maximize your profits. And I don’t know about you but I’m all about the money.
How is stakeholder capitalism different? Stakeholder capitalism holds that a corporation is not only answerable to it’s shareholders, but to anyone that has a “stake” in the company.
Are you an employee?
They must answer to your values.
Are you a customer?
They must answer to your values.
Are you a locality in which the corporation does business or is located?
They must answer to your values.
Are you an investor in the corporation?
They must answer to your values.
This poses a decent sized question for stakeholder capitalism investors. How are these investors to know if Widget Corp is a corporation they should support?
Good News! There’s a scoring system. What could go wrong???
ESG investments are decided based on an ESG score. There are 3 factors that determine if a corporation is meeting the stakeholder’s expectations.
Environmental: Is Widget Corp a good steward of the environment? Are they doing their best to prevent climate change? What measures are they taking to reduce carbon emissions? Are they contributing to air pollution? If so, how much?
Social: Is Widget Corp considering humans and their interdependencies? What does their staff look like? Are they diverse enough? Do they participate in social causes in the community? Do they look after the mental health of their employees?
Governance: Is Widget Corp running their business in the way we would like? What does their board of directors look like? Are they promoting on the basis of equity? What do their political contributions look like? Are they implementing Diversity, Equity, and Inclusion training for their staff?
We grade Widget Corp in all of these areas and VOILA, you now get an ESG score. Investment Financial can now make a decision on whether to by stock in Widget Corp or whether to lend money to Widget Corp. Everybody wins!
Alright, no they don’t.
Now you may think some of these are values you care about. Maybe I do too (but probably not, I tend not to care about much). But, let’s do a thought experiment.
Let’s say their is a worldwide protest (or at least a western world protest) against a thing. This is only an example, but for the sake of argument we will say it is against perceived systemic racism. And some of these protests become, shall we say, out of hand. We’ll just say they are fiery but mostly peaceful.
While this is happening let’s hypothetically say there is a relatively opaque organization that supports these protests. They are organizing them. They are essentially the spokespeople for these protests and they need donations to support the organization. We’ll call them Systemic Racism Sucks (tho, they totes prefer to be called by their initials - SRS)
Widget Corp, like a lot businesses, needs to keep the lights on. And to keep the lights on (and keep the widget makers employed) they need investments. And while $100,000 may seem like a lot of money… it’s gonna keep that ESG Score nice and high. A nice and high ESG score ensures that Investment Financial is willing to continue investing. And not giving $100,000 would indicate that Widget Corp may be indifferent to systemic racism. Or WORSE, Widget Corp could be perceived as being totally down with systemic racism. So, weighing their options, Widget Corp makes a donation to SRS. It may not be popular with a lot of the employees (who feel like these fiery, but mostly peaceful protests are not exactly helping). It may not be popular with a lot of the customers. But Widget Corp knows that people need widgets and they’ll most likely look past this donation. And all the other corporations are giving donations. The people angered will likely forgive and forget. Heck, the angry customers and employees are luckily the group most likely to forgive and forget.
Widget Corp makes the donations. And pledges they support SRS on their social accounts.
But what if SRS is a VERY shady organization?
Like let’s say they bought MANSIONS with the money corporations were donating to them?
And they made themselves personally rich with those donations?
What if they avoided even paying the fair amount of taxes on those donations?
And no one could really point to anything they had done, other than organize protests, to rid the country of this perceived systemic racism?
Don’t worry about that. Widget Corp’s future is secure. And sure, your 401k isn’t growing because they are more concerned about appeasing the mob than maximizing your profits but that’s ok. ESG scoring is based on a set of robustly defined rules (spoiler alert - they change) that would never, I repeat, NEVER prevent someone from accessing capital because a day before you said you were going to vote for Republican. Never!
ESG is the investment equivalent to China’s social credit scoring system. And gosh darnit, it isn’t just me saying that! It is intended to make corporations act in a way they wouldn’t otherwise act to ensure they stay viable. It is the hidden reason why corporations do things that make you ask “Why in the world would they do THAT?” And that’s not really good for U or 4 ME!
https://x.com/blmchi/status/1711793142742073573?s=46&t=LxKX2Lqugnjm2ywN5mHPrQ