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Get Rid Of The E, S & G Of The ESG: Aswath Damodaran

Aswath Damodaran is a fierce critic of the environmental, social and governance (ESG) concept. The corporate finance and valuation guru at the Stern School of Business at New York University believes that he “can stir the pot” on this issue. In an email interview with Rajiv Tikoo, Damodaran questions the basis of the ESG concept and its “hindsight revisionism” in the context of the Adani episode and the Ukraine war


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Edited excerpts: 

You say ESG concept deserves to be termed the “biggest con” more than Gautam Adani. Why?

Because the essence of a con is that you are selling something that does not exist. The Adani group, in spite of all its faults, has ports and airports. The ESG concept is built on a mirage, measuring something that cannot be measured at a collective level, making claims about how adopting this empty measure will make companies more valuable and investors richer, and marketing it all under the guise of virtue.

What will be the short- and long-term fallout of the Adani episode on the ESG ecosystem?

Very little. It just adds to the evidence that ESG always seems to work in hindsight. The same services that classified the Adani group as a high ESG score company tell you in hindsight that it has a low ESG score, and it is not the first time that you are seeing this hindsight revisionism. The ESG services gave high scores to FTX before it blew up, and to companies exposed to Russia before its invasion of Ukraine, and reclassified them after the blow-up.

Why do you criticise the concept on the issues of risk management and value creation potential?

What is the point of a risk management system that does not seem to catch risks before they manifest? And this nonsense about value creation represents the fevered views of people who do not know valuation, but just make up stuff as they go along.

Is the current ESG system a tool of the developed world to favour its own companies?

No. It is not a country-level conspiracy. It is a tool for consultants, bankers and academics to enrich themselves, and to be honest, if a few hundred million people have to be thrown under the bus, so be it. That is why, “feckless knaves” is what I would call them.

As this concept continues to grow, will it lead to more instances of ESG-washing?

ESG-washing is a feature of the ESG concept. In other words, it is a natural outgrowth of an ESG-measuring system.

The journey of the ESG bandwagon seems irreversible. What would be your topmost three suggestions to improvise it?

It is a garbled concept. Here are my three suggests. Get rid of the “E”, since you are just pushing climate change problems behind the curtain, not getting rid of them. Get rid of the “S”, since neither Sustainalytics nor Refinitive has the power to decide what represents good or bad on a social issue; and get rid of the “G”, since ESG advocates have hijacked governance research, which is about shareholders holding managers accountable, and replaced it with a stakeholder governance mechanism, which only a lawyer will love. The ESG folks can keep whatever is left over.