Terence Corcoran: On the OECD and ESG and WE

New OECD report suggests ESG concepts are unworkable and unmeasurable. Milton Friedman would agree. And so would WE

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In a weighty report this week, the OECD — which represents the governments of the world’s developed nations including Canada — delivered another package of nails intended for the coffin the agency is building for market capitalism. Titled Sustainable and Resilient Finance, the report is part of a continuing series on how the world financial system can incorporate “sustainable finance” into corporate decision-making, the objective being to force corporate executives to make environmental, social and governance (ESG) issues a core part of their corporate missions.

The report itself, however, waves a handful of large red flags over the ESG movement, which in the past couple of years has been championed by a cabal of some of the world’s leading corporate and financial figures, from Larry Fink at BlackRock Inc. to Canada’s own sustainable finance activist, Mark Carney — and by such global anti-capitalist organizations as the World Economic Forum. The WEF’s 2020 Davos Manifesto called for global adoption of the idea that the purpose of a corporation is to fulfil “human and societal aspirations as part of the broader social system. Performance must be measured not only on the return to shareholders, but also on how it achieves its environmental, social and good governance objectives. Executive remuneration should reflect stakeholder responsibility.”

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The main objective of the movement, unstated in this week’s OECD report, is to overthrow the legal and economic — and political — principles that have dominated corporate governance for many decades, principles most clearly outlined 50 years ago by Nobel-winning free-market economist Milton Friedman. In September of 1970, Friedman wrote a commentary in The New York Times titled “The Social Responsibility Of Business Is to Increase Its Profits.

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To mark the anniversary, the Times last month published a collection of commentaries under the headline “A Free Market Manifesto That Changed the World, Reconsidered.” Most of the assembled voices sought to overthrow Friedman’s principle that corporations and executives have no business running the world’s social and political regimes and should stick to making profits for shareholders. They should not be allowed to sidle into bed with social, environmental and economic activists who, with politicians, will run the world. While Friedman did not use the word, he sought to prevent the rise of corporatism.

FP columnist Matthew Lau has pointed out that, with all the proselytizing against Friedman, profit-making still dominates corporate behaviour. “Despite increasing condemnations, including from within the business community, the Friedman doctrine on social responsibility lives on.”

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As the new OECD report makes clear, the campaign to shift the focus of corporations and their executives away from profits-first also lives on. The report takes it for granted that ESG and sustainable finance is the way of the future. Unfortunately, the OECD’s 200-plus pages of analysis suggest the whole exercise is mired in confusion and may be unworkable as a measurable foundation for corporate behaviour and investment decisions.

The report is filled with research that reveals ESG problems throughout the financial markets and within corporations. There are “shortcomings” and “inconsistencies” across the sustainable “ecosystem.” Some highlights from the OECD executive summary include:

? Current market practices, from ratings to disclosures and individual metrics, present a fragmented and inconsistent view of ESG risks and performance.

? This fragmentation and incomparability may not serve investors in assessing performance against general ESG goals, or such targeted objectives as enhanced management of climate risks.

? Banks are also looking to scale up ESG integration in lending transactions, but also face capacity, competition and data challenges.

? If left unaddressed, challenges in ESG investing could undermine investor confidence in ESG scores, indices and portfolios.

While supportive of ESG, the new OECD report essentially raises serious doubts about how measurement methods, metrics and analysis can possibly assess the success or failure of corporate ESG initiatives.

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There is certainly plenty of evidence the corporate structures are ill-equipped to assess the value of ESG activities.

A good micro-example of corporate ESG meltdown is the role major business enterprises played in the rise of the Kielburger brothers’ WE Charity. Major Canadian and U.S. corporations, directly and through foundations, gave tens of millions to WE over the years — from RBC to KPMG to Microsoft — and joined in WE marketing campaigns. A blog by Vivian Krause details the corporate involvement with WE. When the crash came they pulled their backing.

What due diligence did these companies perform before they started turning over millions of dollars to WE? Is the corporate ESG assessment before sending $5 million to WE (or any other charitable or environmental group) as diligent as a profit-seeing business assessment made before spending $5 million on the purchase of equipment or building a new plant?

Friedman’s view was that when corporate executives (and their delegated minions) engage in ESG activities, they become in effect public employees and civil servants, part of the state political apparatus. As heads of profit-making operations, corporate executives are charged with running a business making useful and valuable products in search of measurable profits. Is it possible to simultaneously impose social, environmental and other mandates determined by activists and politicians?

Milton Friedman thought the idea unwise and politically dangerous. The latest OECD report details go further, suggesting ESG concepts are beyond market measurability and therefore unworkable.

Financial Post

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