National Post (Latest Edition)

ON THE OECD AND ESG AND WE.

- Terence Corcoran

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.”

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.

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.”

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.

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.

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