A Fool and His Money

By Noah Rothman

Tuesday, December 13, 2022

“Effective altruism,” the social movement dedicated to maximizing the benefit of charity for the most people, isn’t a scam. At least, not in concept. Nor is philanthropy in general (despite the protestations of those on the left who resent the ancillary advantages philanthropy affords the philanthropic). But it is a “work.”

If you’re blessedly unfamiliar with “carnie” parlance, a “work” is a staged performance presented as entirely authentic. The opposite of a “shoot” (as in, “straight-shooter”), a “work” can take many forms and involve any number of players. For example, the “talker” attracts customers, and the “stick” passes himself off as the lucky sort who demonstrates the game is winnable. It usually isn’t, but not always. Someone has to walk away up, or the only loser will be the house.

Sam Bankman-Fried is a masterful “talker.” His cryptocurrency scheme might have been a “shoot” insofar as cryptocurrency and the blockchain technology that makes it possible are legitimate investment vehicles. But “effective altruism” is what brought in the marks. He surrounded himself with celebrity “sticks,” pitching a secular version of the prosperity gospel—they call it “earning to give.” The practice crosses the line into fraud when it involves a conspiracy. In carnie speak, it’s when an unseen “gaff” manipulates the game so that it is unwinnable. By using comingled investor-provided funds for personal gain while wrapping himself in the flag of good intentions, Bankman-Fried was, according to the SEC, at the head of a complex scheme. But it was little more than a shell game.

The game is up for Bankman-Fried, but “effective altruism” and its like will forever prey on the well-intentioned. Even as this plot’s targets process their victimization, they’re passionately defending another obvious kayfabe focused on the very same constituency. They call it “ESG”— Environment, Social, Governance—investing.

Much like “effective altruism,” ESG investing is an unnecessarily complicated way of describing an investment strategy that incorporates non-financial factors. It describes a movement in which socially conscious investors, who want their portfolios to generate a sense of personal gratification as well as a return on investment, privilege enterprises that engage in garish displays of communitarianism. In the aggregate, the activist class maintains, an ESG strategy will impose progressive social discipline on even the most recalcitrant firms. But ESG has recently come under attack, primarily from political actors on the right, and not just because it has become a vehicle to achieve leftwing policy goals by non-political means.

Writing in Mother Jones, editor Kiera Butler focuses on how Florida Gov. Ron DeSantis is leading the charge against ESG by divesting $2 billion of his state funds from a champion of this new investing paradigm, the asset management giant BlackRock. “Using our cash to fund BlackRock’s social-engineering project isn’t something Florida ever signed up for,” said Florida’s CFO Jimmy Patronis. Butler maintains that Tallahassee has, wittingly or otherwise, fallen for a conspiracy theory.

Doubtless, some wildly conspiratorial claims about what Blackrock and others in the ESG space have planned are floating around on the right. But that alone does not render the backlash to ESG a “moral panic” or the full flowering of a “conspiracy theory.” ESG’s critics are merely paying attention.

This investment theory represents a violation of an investment firm’s fiduciary responsibility to provide its clients with the biggest return possible at acceptable risk levels. Instead, it replaces dispassionate financial considerations with fervent political concerns. It is the conduct of governmental affairs by financial means—leveraging capital to impose equity-related initiatives on boardrooms and green practices on private enterprises.

This isn’t an illegal practice—at least, as long as ESG initiatives aren’t compelling firms to break the law, like, say, compelling insurers to consider race when issuing policies. But even in its most anodyne forms, ESG explicitly introduces value judgments into the investment landscape that are designed to undermine efficiency. For investors who like ESG’s priorities, that’s all well and good. For everyone else with money in the markets, mutual funds, or brokerage firms and who wants nothing more than to maximize their retirement savings, it’s something else.

“Pick a company in the Fortune 500 and sample the top five ESG ratings providers—a correlation of less than 50% is normal,” a team of Barron’s analysts wrote in May. “By comparison, the top five ratings providers for a typical corporate bond from the same Fortune 500 company would likely have a correlation greater than 80%. This kind of result undermines confidence in ESG writ large.” That realization is having a predictable effect on the investment landscape. Assets in “sustainable investments” in the United States plunged by more than half since 2020, down to $8.4 billion from $17 billion two years ago. ESG investing now represents just 12.6 percent of U.S. assets under management. If this is a conspiracy theory at work, it may be the most successful conspiracy theory in modern times.

Like “effective altruism,” giving to and investing in personal priorities is nothing new. Nor is it remarkable that some investors want to do good works as much as they would like to make a profit. None of this needs to be dressed up as though it’s a new idea. At least, not unless it’s a “work” designed to draw in unwitting customers who would otherwise be inclined—or, indeed, required—to avoid potentially risky schemes.

State treasurers, for example, are so obliged. They manage their states’ investments in 401Ks, retirement portfolios, and pension plans. A firm with a “low ESG rating” may be a sound investment based on every relevant metric and might still lose out with big investment firms. Elon Musk’s electric-car company Tesla is one such firm. Despite a five-year expected growth rate of 31.4 percent, well above the industry average, the firm has angered the high priests of ESG.

“While Tesla may be playing its part in taking fuel-powered cars off the road,” said Margaret Dorn, S&P Dow Jones’s head of ESG indices. “It has fallen behind its peers when examined through a wider ESG lens.” What she calls a “lens,” others would deem a pressure campaign. You can be as green as Ireland, but if you’re contracting with the military, exploiting fossil-fuel deposits, or involved in a “controversial incident,” you’re out of luck. You can guess which one of these infractions resulted in the ejection of Musk’s firm from the S&P 500’s “ESG index.”

Musk’s indictment of ESG notwithstanding, it’s not a “scam” per se. Or, rather, it’s not a fraud. It’s a squeeze play, and it’s a “work.” It preys on our most noble impulses, which is why it’s so effective. At some level, the mark enjoys the game, even if he knows the deck is stacked against him.