James Anderson, the co-manager of Scottish Mortgage Investment Trust plc, is the latest fund manager to launch a diatribe against a rule-based ESG approach to achieving sustainability within the corporate world.
Writing in the most recent edition of Baillie Gifford’s Investment Trust Magazine Mr Anderson employs a similar line of argument to that of Tariq Fancy, a former head of sustainable investing at BlackRock, the world’s biggest investment manager.
ESG rules are not only misguided: they may be counter productive.
“...ESG frameworks are not just gestures, not just ill-thought through metrics and distractions, but in aggregate they are profoundly damaging to the prospect of changing the corporate sector - even the world for the better,” Mr Anderson writes.
“If we believe, demand and enforce a standard template for all companies, in all industries and in all countries then we will have an arid, unimaginative, fearful and rule-book driven world.”
The reality is that the standard ESG approach to sustainability will almost certainly fail to identify many of the firms that could have a transformative effect to achieving this end.
Elon Musk’s Tesla, a firm which Mr Anderson backed almost from the outset, illustrates his case.
“By now it is obvious to even the most myopic observer that Tesla has turned the automobile industry in an increasingly sustainable direction,” Mr Anderson continues.
“It’s not that Tesla itself replaces internal combustion engines but much more that it has forced change on a recalcitrant industry. Without Tesla the current transition would have been fatally later and slower - perhaps beyond a tipping point.
“Yet the standard metrics tell me that Tesla itself pollutes, has ill defined future metrics and that it takes up a fair portion of Scottish Mortgage’s carbon exposure.”
Furthermore, Tesla disobeys many governance metrics.
“From the board composition to incentive schemes to tensions with the SEC to Twitter radicalism, this is not a company to gladden ESG and voting advisor hearts.”
And yet in terms of outcomes the net effect - so far at least - appears to have been beneficial in terms of making the automotive sector much more sustainable...
But would it have been so had Tesla conformed with ESG best practice?
Mr Anderson thinks not.
“...I do not believe that Tesla would have changed the world for the better if it had been a normal company paying heed to the standard governance codes,” he writes.
“For a company and CEO so dependent on radical thought, so blindingly impatient of conventions and constraints, it’s hard to believe that “normal” behavior would have been feasible or beneficial.
“Would a standard board have risked all on a revolution that came within weeks of disaster?
Would Musk have survived the many moments of controversy?
“I think not.”
Of course Tesla may be an extreme example.
But the reality is that there are probably many other firms that are generating positive transformations on their industries and society in general despite not ticking all the ESG boxes.
All this emphasises the fact that there are almost certainly more ways of generating positive outcomes on the sustainability front than by strict conformity to an explicit ESG agenda.
A conventional rules-based approach may bring existing companies to heel on the sustainability front.
But it may do very little to help spawn new innovative companies that can provide real solutions to the longer term problems facing society and the world.
Scottish Mortgage Investment Trust is a London-listed investment company with around £21.3 billion of assets.
