Reminds me of the term "conspicuous altruism." There are people who didn't want to install solar panels facing the direction that gets them the most solar energy, but instead they want it to face the direction that other people can see.
I am an mba student and esg is widely Prophecized while each objection is pushed aside as bad implementation of esg. I think esg as corporations became massive institutions they use esg to defend their existence and put up barriers to new market entries they also have the money to waste on these things. Thank professor for being the only one who dares to argue against it!
Thank you professor. Great video as usual. It's worth to mention that from the industrial point of view, the ESG is mostly about protecting businesses from disasters. Those disasters like both Vale and Boeing have been recently involved. Those events clearly reflected on their balance sheets. It is hard to estimate how much value ESG and EHS bring before something really bad happens.
The risk argument sounds good in theory but in practice it doesn't seem that convincing. As Damodaran mentioned, if you compare multiple systems the scores look essentially random, maybe with a bonus for market cap. Have you looked at how Vale/Boeing scored before the drawdowns? I don't have 80,000USD lying around to buy historical data on a system but looking at some of the inputs suggests they would have scored at least average.
Spot on Prof. Although I would say the one redeeming quality about esg is that investors are considering more such (tail) risks now. And you alluded to this in your slide on discount rates. It can definitely be useful from a bottom up risk lens, just not on alpha and similar claims..
I enjoyed this video and many of he points you made. I especially enjoyed the research findings you summarized. But I think you overlooked a very simple reason for investing in ESG: many ESG indexes exclude pretty obviously bad industries such as oil, gas, and weapons manufacturing. When I invest in an index fund, I’d like to make market-level returns. I’d also like to avoid profiting from gas, oil, and weapons, and I don’t want to contribute to those industries’ market caps. Funds like Vanguard’s social index fund seem to do just that (time will tell). That said, I’m under no delusion that investing in a ESG fund does good for the world. Thank you for sharing this and your other videos!
Good points. You can measure causality a bit better by looking at ESG momentum. Also many hypotheses for ESG should also be looking at momentum as well. But also because most disclosure is lagged chicken and egg problem is still there.
Excellent. Intellectually honest analysis rather than the usual ivory tower virtue signaling herd-speak. There are no objective criteria. In the absence of objective criteria, results are definitionally arbitrary. In reality, they're more political than useful.
Thank you for explanation on this touchy topic. No need to put a halo around companies and CEO for acting responsibly or hiding behind a ESG score even as their actions are questionable. If companies were wanting to treat their employees with dignity as claimed in CEO Charter then people would not have been quitting in droves.
Great video. Agreed with most of this (one thing that stood out was the Mother Teresa comment). This video shows why clubbing Climate Change into ESG at the very least confuses the issue, and perhaps hurts it. As opposed to the (accurate) theme of the video that goodness is tough to measure, and subject to all sorts of manipulation, there is hard science behind climate change (albeit hard to measure), so in this case the "goodness" measure is probably as close to objectivity as possible. The point about transition returns also indicates that there is at least a likelihood of either good companies being underpriced (as climate change risks are possibly grossly undervalued at this point), or that most companies are "bad" and therefore overpriced. Either way, there doesn't seem to be a divergence between the points made here and the focus on climate change. The last point on the video - that personal responsibility is at least as important as corporate responsibility - may be true in ESG as a whole, but when it comes to GHG emissions the urgency factor of addressing this at scale probably overwhelms this argument. Overall terrific argument - thought-provoking!
Great video and I agree with all that you’ve said , but I feel like you missed the risk part of the equation here. “Good” companies I’m assuming have lower risk profiles from: customer dissatisfaction on practices leading to boycotts, more sustainable companies have less government regulation risks, less legal risks from being sued for negative externalities, Also the human capital benefits of better employee loyalty and alignment with goals.
Prof Damodaran one perspective we, I hope, can agree that more disclosure about companies is better. Currently, ESG is being looked at by regulator organizations such as IOSCO and national stock exchanges to avoid the 'greenwashing' your presentation talks about. This will hopefully lead to more consistent reporting in the future. Our organization, AKFI (Actionable Knlwlege Foundational Institute), looks at ESG as part of a larger transformation process of companies. Through this lens, ESG and Digital Transformations will help the financial and rating industries to better predict future risks. The tiered "past performance is not indicative of future results..." can become 'past performance may be a predictor of future risks (and that's what investors want to know). Once risks are identified, we can measure how companies plan and prepare. That will impact their resilience and longevity.
Thanks for the great video. The only thing I disagreed with is that Mother Teresa was objectively "good". That is a highly debated topic and multiple books have been written for and against that view: en.wikipedia.org/wiki/Criticism_of_Mother_Teresa
Firstly, I congratulate you to talk about such an important topic in a clear and open manner in an open forum like this. Most of the companies are involved in satisfying our emotional rather than physical needs, but by using natural resources to satisfy this need. The only way this will end is either our emotional needs reduces or there are resource limitations. I believe that we need to factor in i) life in general is not programmed to account for permanent limitations in resources (a tiger will eat all its prey given a chance without thinking that there would be none left very soon), ii)the culture of "public good" is very rare and definitely not natural, iii) species get extinct and newer species are formed using the same natural resources. Humans and their livestock today form one of the most abundant species by population (beaten by ants, termites and bacteria) and one of the top by biomass, both of it are continuously increasing. This has been possible only by the mechanism of "markets" and "returns on investment" as a fuel. The real question to ask is where do we "Sapiens" stop and how? Can we use the same mechanisms and same fuel?
Reminds me of the perennial discussion about the causality between corporate culture and performance. In practice these relationships are complex becuase they are inter-connected which makes the theory difficult to put onto one slide.
I think esg should be a good long term defense against future legal costs or being kicked out of business if the regulations change. It is also a market entry barrier and therefore stifling competition and being a net loss to society and potentially even to the enviorement because enviorement saving technologies aren't being invented or only much later.
I think the ESG measurement / consulting push is "suspect" notwithstanding the key elements of E and S are clear and companies should ve pressured to better align / advance more than more, more , more (short term) return.
It's difficult to imagine that traditional business, like how coca cola poisoned water sources, chemical companies causing cancer, oil producers devastating the ocean, while being saddled with billions of long term liabilities, are better than esg aligned businesses. It requires some mental gymnastics to prove something so intrinsically illogical. I work in esg, and criticize the esg ratings and systems every single day. But i don't burn down the house because some pipes are leaking . It's amazing that we have people who don't question the work of investment bankers and everyone in between for the past 100 years and the trillions they have earned through facilitating the devastation of the planet, created billions in long term liabilities, walked away still rich. Its truly inconceivable how these arguments make the light of day. The democratisation of free speech is a human right, though, so perfectly acceptable.
Professor what are your thoughts on CSR rules in India? Is it better to just have a CSR mandate that achieves the objective of doing good for society while cutting out the entire ESG gravy train?
I've written numerous papers about this throughout undergrad and graduate school. I never liked ESG from the moment I heard about it. It's basically leads to a collectivist debt based society instead of a equity based society.
Definitions of ESG used re not right. Pl use SFDR /ISSB definitions - there is no goodness concept- it matter of impact OF company on its environment (negative externalities and paying for all resources factors used) and also Impact ON.
The outcome of good esg practice completely depends on the impact it has in the long run. That completely depends on the power of the organisation that embraces it, just don’t forget what compliance actually means. This prof thinks a bit more like a compliance manager than a ceo.
I agree that "ESG" is mostly a scam, though one thing to consider is that appearing to be virtuous is very important for attracting and retaining top talent, especially in certain fields. I don't *like* that 70% of the best people who e.g. Google would like to hire are fully onboard the wokeness train etc., but that's a fact of life, and if Google looks more woke than Oracle, then that gives Google a huge hiring advantage over Oracle, in a business where having as many of the highest skilled employees possible is everything to you.
If you are anything more than an amateur investor, making higher returns is easy. Anybody can see the evils of the world and support it with your investment dollars. Defense contractors, private prisons, tobacco companies, Arby's, whatever. This requires little effort. I am willing to sacrifice higher returns to support companies that pay their people, do not kill, try to accomplish some good in this world, and isn't contributing to a dystopian apocalyptic hellscape so that I can S.W.a.N.
Sure, ESG's are a circular economy circle jerk. But isn't the fashion industry? Isn't the marketing industry? Haven't humans always created more and more fancy means to establish hierarchies within ourselves? Some of those have always been hierarchies based on arbitrary values. To most humans, the distinction between amaranth purple and telemagenta is pointless, yet we still have complete industries with artists, painters, marketers and consumers who appreciate the distinction. With ESG's, we're just expanding the scope of our empathy a little wider than present living humans.
Damodaran doesn't understand the fundamental link between ESG and human psychology. There are numerous studies showing that when people derive more meaning from their work, they perform better. Getting your employees to believe in the company mission more will result in higher value, plain and simple. I bet if you were to look at similar companies, but one with higher ESG scores, you'd find it would have lower people costs and less turnover than the lower. Also, Damodaran himself talks about the power of stories. Perhaps he means it from the evaluation perspective- but consider the power of story for companies with a strong mission tied to ESG. They'll get more hype and more airtime and lower marketing costs. Third, consider the impact of green bonds- investors who want to invest in green companies are willing to get lower rates of return, therefore you have lower costs of capital than bad companies.
Well, being an investor in Uber and JP Morgan explains A LOT why prof. Damodaran doesn't really understand much about ESG. Just to mention one point, the whole argument about philanthropy is evidence of the old thinking. Externalities (mostly the negative) are not priced in the mainstream valuation models. JP Morgan shareholders can become rich enough, and donate a lot, but this is nothing compared to the harm of billions in Loans in the banks balance sheets financing Oil&Gas (btw JP Morgan is the largest one to finance Oil&Gas).... He also mentions that a challenge in ESG Investing is about Values, which can differ from one person/allocator to another....This I could try to agree with, but it is also not the case in many aspects... Is tackling inequality a matter of values? There is pretty much a lot of (economic/econometric) evidence showing, for instance, that widening the gap hurts potential economic growth. Anyhow, even if you were right, prof. Damodaran, what about the moral compass in this discussion? So let us celebrate those that are offshoring their production, exploiting workers elsewhere (not to say the uber drivers in your own country), harming the environment, and keep waiting that the nice multi-billionaires donate when they are 80yrs old+ their money? lol Thank you for the lecture!
I don’t see what the problem is. Yes everyone is making money but at least it has corporate America thinking about the environment. This is of course, corporate populism, but this is the 20’s at least they give somewhat of a shit about the environment.
you start off from the very fluffy notion that ESG is about 'goodness'..no, ESG is about reigning in out of control companies. The most important element within ESG is the G - which is governance. Maybe the Pandora Papers will give you food for thought
Reminds me of the term "conspicuous altruism."
There are people who didn't want to install solar panels facing the direction that gets them the most solar energy, but instead they want it to face the direction that other people can see.
Expressive benefits trump utilitarian benifits in things like these.
Signaling.
I am an mba student and esg is widely Prophecized while each objection is pushed aside as bad implementation of esg. I think esg as corporations became massive institutions they use esg to defend their existence and put up barriers to new market entries they also have the money to waste on these things. Thank professor for being the only one who dares to argue against it!
ESG is the new "socialism" or "communism". It wasn't done properly.
probably the BEST video on the topic, your intellect really shines, respect from India
Inspiring Aswath, wish I had discovered you years ago!!
This new tube sound effect makes you sound like C3PO. Excellent video professor!
thanks prof loved your comment of people flying private jets for climate meeting
Amazing video! I have recently seen a corporate presentation from a small cap miner and slide 2 covered esg strategy. Immediate red flag 🚩
Thank you professor. Great video as usual.
It's worth to mention that from the industrial point of view, the ESG is mostly about protecting businesses from disasters. Those disasters like both Vale and Boeing have been recently involved. Those events clearly reflected on their balance sheets. It is hard to estimate how much value ESG and EHS bring before something really bad happens.
The risk argument sounds good in theory but in practice it doesn't seem that convincing. As Damodaran mentioned, if you compare multiple systems the scores look essentially random, maybe with a bonus for market cap.
Have you looked at how Vale/Boeing scored before the drawdowns? I don't have 80,000USD lying around to buy historical data on a system but looking at some of the inputs suggests they would have scored at least average.
This may be your best video, professor.
Spot on Prof. Although I would say the one redeeming quality about esg is that investors are considering more such (tail) risks now. And you alluded to this in your slide on discount rates. It can definitely be useful from a bottom up risk lens, just not on alpha and similar claims..
Great Video Aswath, Filter for the noise of the market. Loving the "gravy circle" haha.
Thank you prof. Damodaran ! It's been very informative !
I enjoyed this video and many of he points you made. I especially enjoyed the research findings you summarized. But I think you overlooked a very simple reason for investing in ESG: many ESG indexes exclude pretty obviously bad industries such as oil, gas, and weapons manufacturing. When I invest in an index fund, I’d like to make market-level returns. I’d also like to avoid profiting from gas, oil, and weapons, and I don’t want to contribute to those industries’ market caps. Funds like Vanguard’s social index fund seem to do just that (time will tell). That said, I’m under no delusion that investing in a ESG fund does good for the world. Thank you for sharing this and your other videos!
Good points. You can measure causality a bit better by looking at ESG momentum. Also many hypotheses for ESG should also be looking at momentum as well. But also because most disclosure is lagged chicken and egg problem is still there.
Excellent. Intellectually honest analysis rather than the usual ivory tower virtue signaling herd-speak. There are no objective criteria. In the absence of objective criteria, results are definitionally arbitrary. In reality, they're more political than useful.
Excellent. Point made on 7:32 on cause vs effect perhaps also applies for 'Women in mgmt ' topic
Thank you for explanation on this touchy topic. No need to put a halo around companies and CEO for acting responsibly or hiding behind a ESG score even as their actions are questionable. If companies were wanting to treat their employees with dignity as claimed in CEO Charter then people would not have been quitting in droves.
I'm wondering why Prof. Ashwath hasn't been cancelled yet! 🤣
I agree with every word that said Professor Damodaran
Great video. Agreed with most of this (one thing that stood out was the Mother Teresa comment). This video shows why clubbing Climate Change into ESG at the very least confuses the issue, and perhaps hurts it. As opposed to the (accurate) theme of the video that goodness is tough to measure, and subject to all sorts of manipulation, there is hard science behind climate change (albeit hard to measure), so in this case the "goodness" measure is probably as close to objectivity as possible. The point about transition returns also indicates that there is at least a likelihood of either good companies being underpriced (as climate change risks are possibly grossly undervalued at this point), or that most companies are "bad" and therefore overpriced. Either way, there doesn't seem to be a divergence between the points made here and the focus on climate change. The last point on the video - that personal responsibility is at least as important as corporate responsibility - may be true in ESG as a whole, but when it comes to GHG emissions the urgency factor of addressing this at scale probably overwhelms this argument. Overall terrific argument - thought-provoking!
"Good work ain't cheap, cheap work ain't good." - Sailor Jerry
Great video and I agree with all that you’ve said , but I feel like you missed the risk part of the equation here. “Good” companies I’m assuming have lower risk profiles from: customer dissatisfaction on practices leading to boycotts, more sustainable companies have less government regulation risks, less legal risks from being sued for negative externalities, Also the human capital benefits of better employee loyalty and alignment with goals.
Prof Damodaran one perspective we, I hope, can agree that more disclosure about companies is better.
Currently, ESG is being looked at by regulator organizations such as IOSCO and national stock exchanges to avoid the 'greenwashing' your presentation talks about. This will hopefully lead to more consistent reporting in the future. Our organization, AKFI (Actionable Knlwlege Foundational Institute), looks at ESG as part of a larger transformation process of companies. Through this lens, ESG and Digital Transformations will help the financial and rating industries to better predict future risks. The tiered "past performance is not indicative of future results..." can become 'past performance may be a predictor of future risks (and that's what investors want to know). Once risks are identified, we can measure how companies plan and prepare. That will impact their resilience and longevity.
Very precise information on ESG investing
Thank you
That was hilarious at 29:09 when you mentioned Mother Theresa. Thanks for sharing Professor.
Thanks for the great video. The only thing I disagreed with is that Mother Teresa was objectively "good". That is a highly debated topic and multiple books have been written for and against that view: en.wikipedia.org/wiki/Criticism_of_Mother_Teresa
I suspected this but could not find support... now I have. Thanks. Dr. Vijayan, Asian Banking School., Malaysia
This man just destroyed ESG's whole career
Professor I salute you and I don’t do that to too many people 🙏🙏🙏🙏
Will you be posting a new series of your Corporate Finance and Valuation lectures later this year?
Starting in Feb 20222
ITC 🚀🚀
Firstly, I congratulate you to talk about such an important topic in a clear and open manner in an open forum like this.
Most of the companies are involved in satisfying our emotional rather than physical needs, but by using natural resources to satisfy this need. The only way this will end is either our emotional needs reduces or there are resource limitations. I believe that we need to factor in i) life in general is not programmed to account for permanent limitations in resources (a tiger will eat all its prey given a chance without thinking that there would be none left very soon), ii)the culture of "public good" is very rare and definitely not natural, iii) species get extinct and newer species are formed using the same natural resources. Humans and their livestock today form one of the most abundant species by population (beaten by ants, termites and bacteria) and one of the top by biomass, both of it are continuously increasing. This has been possible only by the mechanism of "markets" and "returns on investment" as a fuel. The real question to ask is where do we "Sapiens" stop and how? Can we use the same mechanisms and same fuel?
Just making good long lasting products is better sustaibility e.g. electronic waste created by phones which become slow after 4 years of usage...
Great video. Thanks for sharing Aswath.
Spot on
Reminds me of the perennial discussion about the causality between corporate culture and performance. In practice these relationships are complex becuase they are inter-connected which makes the theory difficult to put onto one slide.
Love the content sir...Love from India🙏🙏🙏😃
I think esg should be a good long term defense against future legal costs or being kicked out of business if the regulations change. It is also a market entry barrier and therefore stifling competition and being a net loss to society and potentially even to the enviorement because enviorement saving technologies aren't being invented or only much later.
I think the ESG measurement / consulting push is "suspect" notwithstanding the key elements of E and S are clear and companies should ve pressured to better align / advance more than more, more , more (short term) return.
What a great man !
It makes me think about the arguments last year in Danone
It's difficult to imagine that traditional business, like how coca cola poisoned water sources, chemical companies causing cancer, oil producers devastating the ocean, while being saddled with billions of long term liabilities, are better than esg aligned businesses. It requires some mental gymnastics to prove something so intrinsically illogical. I work in esg, and criticize the esg ratings and systems every single day. But i don't burn down the house because some pipes are leaking .
It's amazing that we have people who don't question the work of investment bankers and everyone in between for the past 100 years and the trillions they have earned through facilitating the devastation of the planet, created billions in long term liabilities, walked away still rich. Its truly inconceivable how these arguments make the light of day. The democratisation of free speech is a human right, though, so perfectly acceptable.
ITC 🚀
Is the business of ESG similar to SEO consulting services? Just instead of aiming to get higher Google rankings, they aim at investment funds.
Professor what are your thoughts on CSR rules in India?
Is it better to just have a CSR mandate that achieves the objective of doing good for society while cutting out the entire ESG gravy train?
SPACs are getting smacked!
Prof, please explain exuberance amongst Banks on marketing ESG topics?
Bank are tetering on the brink, desperation everywhere!
I've written numerous papers about this throughout undergrad and graduate school. I never liked ESG from the moment I heard about it. It's basically leads to a collectivist debt based society instead of a equity based society.
Are those papers published? I would like to read it :)
thanks for the followup
Should not use ESG framework as stand alone, always must be a blended approach with financial valuation and organisations behaviour (system).
The OG
This topic would make for a great collaboration/discussion between yourself and your colleague at Stern, Jonathan Haidt
Personal opinion , esg actually defeat the purpose of corporate objective.
Strange now esg is actually part of the demand of shareholders.
Good one!
Definitions of ESG used re not right. Pl use SFDR /ISSB definitions - there is no goodness concept- it matter of impact OF company on its environment (negative externalities and paying for all resources factors used) and also Impact ON.
Legend
I think the prof hasn’t differentiated between Impact Investing and ESG integration …
Doesnt matter. His arguments are still valid
Whole world banker are earning by giving share loan.If share price goes down what will be effect to this bank.
I really don't by into ESG.
The outcome of good esg practice completely depends on the impact it has in the long run. That completely depends on the power of the organisation that embraces it, just don’t forget what compliance actually means. This prof thinks a bit more like a compliance manager than a ceo.
Maybe the catholic church should bring a christianess-rating on the market.
I agree that "ESG" is mostly a scam, though one thing to consider is that appearing to be virtuous is very important for attracting and retaining top talent, especially in certain fields. I don't *like* that 70% of the best people who e.g. Google would like to hire are fully onboard the wokeness train etc., but that's a fact of life, and if Google looks more woke than Oracle, then that gives Google a huge hiring advantage over Oracle, in a business where having as many of the highest skilled employees possible is everything to you.
Sup Professor
If you are anything more than an amateur investor, making higher returns is easy. Anybody can see the evils of the world and support it with your investment dollars. Defense contractors, private prisons, tobacco companies, Arby's, whatever. This requires little effort. I am willing to sacrifice higher returns to support companies that pay their people, do not kill, try to accomplish some good in this world, and isn't contributing to a dystopian apocalyptic hellscape so that I can S.W.a.N.
Sure, ESG's are a circular economy circle jerk. But isn't the fashion industry? Isn't the marketing industry?
Haven't humans always created more and more fancy means to establish hierarchies within ourselves? Some of those have always been hierarchies based on arbitrary values. To most humans, the distinction between amaranth purple and telemagenta is pointless, yet we still have complete industries with artists, painters, marketers and consumers who appreciate the distinction. With ESG's, we're just expanding the scope of our empathy a little wider than present living humans.
Damodaran doesn't understand the fundamental link between ESG and human psychology. There are numerous studies showing that when people derive more meaning from their work, they perform better. Getting your employees to believe in the company mission more will result in higher value, plain and simple. I bet if you were to look at similar companies, but one with higher ESG scores, you'd find it would have lower people costs and less turnover than the lower.
Also, Damodaran himself talks about the power of stories. Perhaps he means it from the evaluation perspective- but consider the power of story for companies with a strong mission tied to ESG. They'll get more hype and more airtime and lower marketing costs.
Third, consider the impact of green bonds- investors who want to invest in green companies are willing to get lower rates of return, therefore you have lower costs of capital than bad companies.
Esg...Recipe for everybody to be unhappy 😹hahaha
Well, being an investor in Uber and JP Morgan explains A LOT why prof. Damodaran doesn't really understand much about ESG.
Just to mention one point, the whole argument about philanthropy is evidence of the old thinking. Externalities (mostly the negative) are not priced in the mainstream valuation models.
JP Morgan shareholders can become rich enough, and donate a lot, but this is nothing compared to the harm of billions in Loans in the banks balance sheets financing Oil&Gas (btw JP Morgan is the largest one to finance Oil&Gas)....
He also mentions that a challenge in ESG Investing is about Values, which can differ from one person/allocator to another....This I could try to agree with, but it is also not the case in many aspects...
Is tackling inequality a matter of values? There is pretty much a lot of (economic/econometric) evidence showing, for instance, that widening the gap hurts potential economic growth.
Anyhow, even if you were right, prof. Damodaran, what about the moral compass in this discussion?
So let us celebrate those that are offshoring their production, exploiting workers elsewhere (not to say the uber drivers in your own country), harming the environment, and keep waiting that the nice multi-billionaires donate when they are 80yrs old+ their money? lol
Thank you for the lecture!
I don’t see what the problem is. Yes everyone is making money but at least it has corporate America thinking about the environment. This is of course, corporate populism, but this is the 20’s at least they give somewhat of a shit about the environment.
you start off from the very fluffy notion that ESG is about 'goodness'..no, ESG is about reigning in out of control companies. The most important element within ESG is the G - which is governance. Maybe the Pandora Papers will give you food for thought