CHUD Japanese Corpos getting ready to pivot away from ESG (aka woke capitalism)

Although hard to quantify, there appears to be a strong positive correlation between poor financial results and claims of SDG achievements on an underperforming company's website.

Judge Frank Easterbrook and legal scholar Daniel Fischel identified the corporate executive's fondness for multiple "stakeholders" and social objectives that transcend mere profit in their classic 1996 book, "The Economic Structure of Corporate Law."

"A manager told to serve two masters (a little for the equity holders, a little for the community) has been freed of both and is answerable to neither," they wrote. "Faced with a demand from either group, the manager can appeal to the interests of the other."

The spike in energy prices occasioned by Russia's invasion of Ukraine has concentrated minds on the reality that carbon neutrality and the replacement of fossil fuels by clean alternatives are easier said than done.

Elon Musk's irreverent calling out of ESG as a "scam," BlackRock's furious backpedaling on backing ESG-related shareholder resolutions and the implosion of Sri Lanka's economy after the government arbitrarily committed all its farmers to organic practices are further blows that are encouraging heretical questioning of ESG orthodoxy.

The intellectual incoherence of ESG, however, should have been discernible to a skeptical mind well before the recent shocks to the system. Much of the credit -- or blame, depending on your point of view -- for ESG's fall from grace belongs to Aswath Damodaran, a professor of finance at New York University's Stern School of Business who systematically dismantled ESG's intellectual scaffolding in a series of blog posts and articles starting in 2019.

Damodaran surgically exposed the intellectual fallacies at the heart of ESG. First, the fallacy that ESG investing was "more profitable than" or "at least as profitable as" unconstrained conventional investment. Damodaran demonstrated that this tenet could not logically be true, and that it was false as a matter of empirical fact.

Next, the fallacy that ESG stands for a noncontroversial and objectively identifiable set of political, social and environmental policies. The mishmash of standards published by various self-proclaimed experts and followed by different ESG funds are both mutually and internally inconsistent. At the crudest level, the noble objectives of "eliminating poverty" and "saving the environment" pull against each other.

In the face of cold logic exposing ESG as intellectually empty, its proponents have had no choice but to retreat or be regarded as knaves or fools. Notably, BlackRock Chief Executive Larry Fink's most recent annual letter conspicuously omitted former claims that ESG delivers "better risk-adjusted returns to investors."

In a nation that prefers vagueness to intellectual clarity, the retreat from ESG is unlikely to take the form of outright renunciation. More likely, a consensus will form, helped along by subtle leadership from the likes of Japan's Government Pension Investment Fund, which last year made clear that returns on investment must trump social goals, and Toyota Motor, which has quietly warned against premature abolition of the internal combustion engine.

In many ways, herd behavior is a successful evolutionary adaptation, often more so than pure individual improvisation. At the same time, corporate Japan's unthinking embrace of ESG and SDGs and the absence, until now, of skeptical challenges to group orthodoxy, point to a national weakness.

It will be interesting to see how, and at what pace, the corporate websites of Japan's leading companies will be cleaned up to demote and ultimately remove mention of ESG and SDG ideals.

@LongNose