EIt seems that the investment industry has finally realized that a serious allocation of capital goes beyond short-term financial gains. The increased focus on directing investments in sustainable companies with effective environmental, social and governance principles is intended to help stop climate change and – it doesn’t get any smaller – to make the world a better place. This is what the now familiar abbreviations such as ESG and SDG (Sustainable Development Goals of the UN) stand for. So far so good. The giant tanker changes course.
But in the concrete implementation of how the financial industry and its regulators are now trying to fulfill this mandate, tragic undesirable developments are becoming apparent. Real long-term effects for the benefit of economies, societies and the earth cannot be anchored in the dictates and banal metrics of the ESG dogmatists. Yet they have gained an – unjustified – influence.
Tesla violates ESG requirements
I will try to explain this with an example. Baillie Gifford has long been a large shareholder in Tesla. It is certainly undisputed that Elon Musk steered the automotive industry in an increasingly sustainable direction. Not only because he is replacing the combustion engine in the car himself, but because he has forced changes in an initially unwilling industry. Without Tesla, this transformation to CO2-free mobility would have taken place later and more slowly. That would have been fatal for all of us – and yet, looking at relevant ratings would probably give me a different result because Tesla violates many of the standard metrics used to assess a company’s ESG credibility. If you look at the composition of the board of directors, the compensation system for executives, the arguments with the SEC and the Twitter antics of its CEO, Tesla is not a company that makes the hearts of proxy advisors and ESG dogmatists beat faster.
I consider such concerns to be dangerous nonsense here. If we have to measure something, then the relevant figure for assessing Tesla is not its own CO2 emissions, not even the emissions avoided by its electric motors or the deaths avoided thanks to reduced environmental pollution. Rather, it is the overall benefit of all electric vehicles made across the automotive industry – from GM to VW. Because Tesla forced change and thus changed the world for the better. That is his real contribution.
Willingness to be unreasonable
And I don’t think Tesla would have succeeded if it had been a “normal” company that had adhered to the established governance codes. Would a “normal” board of directors have risked everything for a mobility revolution? After all, their failure was much more than a mere hypothesis at the beginning. Would a “normal” boss have survived the many moments of controversy? Would “normal” investors have withstood the pressure of shortsellers?
I doubt all of that. Now, Tesla may be an extreme example. But aren’t all companies that go beyond mediocrity fundamentally unreasonable? Progress relies on radical thinking and impatience with conventions and constraints. To quote Noubar Afeyan, Chairman of Moderna, “We have to be willing to immerse ourselves in unreasonable proposals and unreasonable people in order to gain extraordinary insights from the idea that perfectly reasonable people doing perfectly reasonable things make great breakthroughs achieve is incomprehensible to me. “
Supporting ideas that may seem unreasonable at first glance, but have the potential to have a positive impact on society – that is our job as investors. But the number of companies that really have the ability to change the world for the better is negligible. And only a few of them will also ensure the added value for the investor. As soon as they are discovered, we must continue to promote and challenge these companies. We are proud to have supported Tesla’s vision and freed Illumina from the clutches of Roche and its hostile intentions.
Damage to ESG goals
To put it to a point: It shows that standardized ESG frameworks are not just gestures, not just poorly thought-out constructs and distractions, but that, taken as a whole, they profoundly damage the change in companies – and ultimately the world – for the better. If we believe we have to enforce a standard template for all companies in all industries and in all countries, then we will end up with a dry, unimaginative, fearful and rule book-driven world.
Tolstoy claimed in his “Anna Karenina”: “All happy families are similar to one another, but every unhappy family is unhappy in its own way.” In business the opposite is the case. Unfortunate companies are similar to one another, but each successful company is successful in its own way. Business success depends on doing things that others cannot do.
Regulators and rating agencies, on the other hand, try to use ordinary multiple-choice boxes to ask about the diversity a company needs to be exceptional. What we need, however, is the courage to find our own less-trodden paths to investment and social advancement, rather than the stubborn adherence to questionable and superficial standards set by others.
The author is a partner at the Scottish investment house Baillie Gifford.
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