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Analysis: The Sage of Omaha has issues with ESG

By Paul Mackintosh  
January 8, 2020

It doesn’t seem fitting for the Sage of Omaha to play Uncle Scrooge over the 12 days of Christmas. Yet the December 30 issue of the Financial Times devotes almost a page to Warren Buffett’s issues with the entire concept of environmental, social and governance (ESG) and socially or environmentally conscious investing. The whole piece appears dogged with the kind of confused terminology and false assumptions that leave Mr. Buffett looking rather less saintly than his reputation would suggest. He quotes his experience as a director of 20 publicly-owned companies, saying that “it’s very hard to evaluate what they’re doing” regarding ESG.

The problems start with the headline, which proclaims that “Buffett parts company with the moralisers”. Would not poisoning people count as moralising? Would not defrauding or evicting them? You see the issue here. “Moralising” in this definition embraces the most broadly pragmatic and coldly realistic criteria of social and environmental value. The G in ESG is supposed to embrace straightforward commercial notions such as shareholder transparency and honest financial accountability. There’s nothing do-goodish about the principle of not defrauding your shareholders.

The E in ESG, meanwhile, is science-based. There’s nothing moralistic about not damaging your living space or the future of your children. Carbon credits are a pretty unlikely equivalent to pious moral homilies, but they are a commercial instrument with a practical purpose. That makes a nonsense of Mr. Buffett’s claim that “it’s very hard” to evaluate what the social or environmental impact of a company’s business is, on any other than purely practical grounds.

I’d object to Mr. Buffett’s presence as a director if he was ignorant of such an important part of the company’s business. There may be different benchmarks, but there can’t be a difference in principle. Not only are the market mechanisms already there, they are now so pervasive in the shape of ESG funds and other operators that a conscientious investor can’t ignore their impact on his or her chosen investments.

The free market is not a self-regulating mechanism. It’s regulated from outside by legal and social frameworks that go far beyond purely economic considerations. Never mind the fact that purely economic considerations definitely embrace long-term climate risk and other environmental factors. There are no conceivable economic grounds for investment or commercial activity that challenge or damage those enabling frameworks. There is no conceivable justification for the law or society to support investment or commercial activity that damages them. You don’t get away with poisoning the public commons out of greed, any more than you do if you do it out of malice.

Yet that is exactly what those who are anti-ESG are advocating. Past generations may have been conveniently ignorant of, or indifferent to, the consequences of their actions; now there is no excuse. Not even if you’re Warren Buffett.