Environmental, Social and Governance (ESG) is the newest buzzword, particularly in investing. ESG aims to add a new metric to quantify existing aspects of an organisation which are not directly linked to profit generation (but then by creating this metric, it makes the company look good, so more people invest, so the stock price goes up...?). It feeds into the shift from shareholder capitalism - where the primary objective of the business is to increase shareholder value (like making decisions to increase the stock price, even at the expense of employees/local community/the world) - to stakeholder capitalism, where the primary objective of the business is to increase value for all stakeholders in the chain, including the end consumer, suppliers as well as the employees and exec level. If you are ESG friendly, it means that the actions taken by your organisation generally helps your local and/or global society, while also treating your employees and suppliers fairly.
I have always been a little confused with ESG, as it's a very ambiguous topic and subjective. Generally, investing in oil companies like Shell was not considered ESG friendly, as from an environmental standpoint, we want to move away from oil. However, since the Ukraine-Russia war, this is being reconsidered, and Shell is being considered ESG friendly by some. Obtaining energy supply from Russia's Gazprom (once upon a time, the largest energy supplier in Europe) was not seen as socially acceptable due to the profits going to the Russian government and in turn helping fund the war. As a result, companies that provided energy that didn't contribute to the Russian government were seen as socially 'better', and therefore considered ESG friendly now. The social aspect of investing in Shell for the time being has overridden the environmental aspect oil drilling that previously were not considered favourable.
I'm going to explore the ambiguity of ESG by looking into battery tech. Specifically sourcing raw materials.
You can probably think of one or two companies right now that you would classify as ESG friendly. Generally, most tech companies are considered ESG friendly. One of the companies that really pride themselves in helping climate change and pushing forward new car technology is Tesla (Elon Musk claims that Bill Gates is actively working against the environment by betting against Tesla). Love Tesla or hate them, without Tesla electric cars would not be socially accepted and viable to the level it is today. They pioneered the battery technology to make it possible. However, they were recently kicked off the S&P 500 ESG Index due to being deemed not socially responsible. There are claims of racism within Tesla as well as Tesla's poor handling of fatal crashes due to its autopilot feature meaning that it was not as socially responsible compared to other companies. Elon Musk was of course not happy and said "ESG is an outrageous scam!" (I'm going to assume he is referring to the ESG index fund rather than the concept itself).
However, I would argue that all tech companies in the S&P 500 ESG fund that use rechargeable batteries in their products (including Tesla) are not ESG friendly from the perspective of social responsibility for another reason: their batteries.
The unspoken story about batteries
One of the ingredients in batteries is Cobalt. Cobalt plays an integral role in storing energy within a rechargeable battery. Cobalt is primarily found in the Democratic Republic of Congo, which has dubious history of Human Rights records at best. There is evidence of local militia gangs regularly employing forced child labor to mine Cobalt, which are then sold to companies like Apple, Microsoft, Google, Tesla or Samsung, to help them make their batteries. It's how it can be sourced for so cheap. Currently, part of the cost of having a lithium-ion battery is child labor. All these companies claim that they examine third party audit reports to ensure that the Cobalt mining companies they work with do not employ child labor, however Cobalt deals always seem to be a bit dodgy (although Tesla are looking to move away from Cobalt battery technology). Currently, unless things change, there is a high chance that a part of the cost in my laptop is child labor.
The supply chain for our laptops and phones are ethically questionable and although may not add to my monetary costs that much, everyone who has a phone or a laptop is part of the system that enables child labor (of course not necessarily by choice). When awareness is attempted to be raised, big companies like Apple aren't so keen on raising awareness on the ethical issues in the supply chain. This system and supply chain is so well integrated into the current society's lifestyle and expectations, it will be tough to make a change. This is a result of decades and centuries of colonisation and exploitation. This change isn't something that will happen maybe in my lifetime. At least the Democratic Republic of Congo government has admitted to the child labor problem, and has pledged to end it by 2025 (hopefully they see this through).
However, there are other aspects that feed into ESG, so the Cobalt mining malpractice easily overshadowed at the moment and big tech can still be considered ESG friendly. ESG is in its early days at the moment but there is real potential for this new metric to push for the big companies (through regulation or investor demands) to demand large corporations to push to make society more fair and better, like forcing organisations that profit off Cobalt mines to ensure that it is as ethically sourced as possible.
Until I see tangible changes happening from ESG activities, I can’t help but be skeptical of it and see it as another tool for investment bankers to make more money.
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If you have a better idea than I do, if I’ve missed out anything or you think I am talking absolute rubbish, feel free to reach out either by commenting on the post, or by emailing me on tanvirtalks@substack.com