Recently, when Tesla, Inc. was kicked out of the S & P ESG, Musk denounced ESG as a hoax, used as a gun by guys disguised as social justice fighters.

The Securities and Exchange Commission (SEC) has also listed ESG (Environmental, Social and Corporate Governance) as one of its key areas of focus this year, and ESG funds face challenges.

Two days ago, Anne Simpson, the former head of CalPERS, the largest public pension fund in the United States and an advocate of the ESG movement, spoke at a conference in New York.It's time to "tear up" ESG (RIP ESG).

The controversy about ESG is getting louder and louder. Is ESG "out of place"?

The end of the ESG era?

In the past few years, the concept of sustainability and stakeholder-centric "ESG investment" has become popular.

This depends in part on the rise of climate activists such as Greta Thunberg, who has succeeded in instilling concepts such as ESG in many chief executives and chief investment officers through speeches and so on.

Second, the popularity of ESG has also benefited from increasing social media and digital transparency, making it easier than ever for activist groups to monitor the behavior of companies, and social events such as the COVID-19 epidemic and Black Lifes Matter have made it difficult for company directors to ignore social welfare.

Or to put it another way, the concept of ESG has changed from a narrow area of activism to the field of risk management of corporate boards. In this area, companies that ignore ESG issues may face reputational damage and losses to customers, investors and employees.

At the same time, ESG funds are booming and the number of ESG funds is surging, with investment groups such as Blackrock arguing last year that companies that do not qualify for ESG perform poorly compared with companies in the same industry.

However, history shows that trends always swing back and forth like a pendulum: when an innovation is hot, it is inevitable that it develops so fast that it goes to extremes and causes problems. Now history repeats itself: after an exciting boom, there is something wrong with the current popularity of ESG.

The problem of "bleaching green" occurs frequently, and it is difficult to coordinate "E, S, G".

A serious problem that leads to reflection is the frequent occurrence of "green" behavior.For example, Desire Fixler, the former chief sustainability officer of Deutsche Bank's asset management division, accused her employer of large-scale "greening" last year, a claim the company denies.

Another, Tariq Fancy, a former sustainability expert from Blackrock, lashed out at the asset management giant, saying that its advocacy of ESG is actually undermining efforts for climate change because it reduces the pressure on the government to take action and does not really channel capital to green causes as it claims.

In addition, Stuart Kirk, head of sustainable investment in HSBC's wealth division, believes that ESG advocates and central bankers, such as Mark Carney, the former governor of the Bank of England, have exaggerated the climate risks faced by investors.

The conflict between Russia and Ukraine highlights another point: the problems of "E", "S" and "G" are difficult to coordinate.Some Russian companies, such as hydropower giant En+, were once welcomed by ESG activists because they tried to embrace green technology, but are now shunned.

For example, Tesla, Inc., led by Musk, who was praised for his high "E" certification, built 3/4 of the new electric cars in the United States last year. However, the minerals used to make these cars sometimes come from dirty mines and poor working conditions, and the company has been criticized for racial discrimination and poor working conditions in factories, making it difficult to meet the "S" standards.

Rethink the rules

So does this mean that the dynamics behind ESG are dead or dying?Probably not. Instead, a better way to describe what is happening is that the problem now shows that the market is maturing and developing in the face of more scrutiny.This challenge may actually make the concept of "sustainability" more sustainable, not less, and eliminate some bubbles.

Fixler pointed out that I think what I did (to crack down on "green" behavior) has broken a bubble to some extent, which will be more conducive to the development of ESG in the long run. At the beginning of the 21st century, there was an upsurge of financial innovation around credit derivatives, but this prosperity was not subject to much supervision or challenge until it was too late. This time, she thinks the challenge comes so early that it will help deal with the bubble.

His view may be correct for the following reasons.One is that regulators are already stepping up their scrutiny.The Securities and Exchange Commission recently settled with Bank of New York Mellon, accusing its marketing copy of exaggerating its ESG claims, which are being followed by other regulators, including not only seller banks but also rating agencies.

Second, as more regulation enters this field, a series of reforms are taking place in the accounting field, and the rules will be more accurate and clear.There will be a growing recognition that investors need to separate "E" from "S" and "G" when creating portfolios and investment strategies, and that centralizing these factors in one rating can lead to confusion.

At the COP26 climate change summit in Glasgow, the International Sustainable Development Standards Board (ISSB) promised to create a new set of comprehensive accounting standards to measure sustainability.

The third factor is digital transparency.Back in the mid-20th century, when Friedman created the vision of shareholder capitalism, it was hard for most investors to know exactly what the company was doing, and the only benchmark was quarterly earnings.

Today, however, investors have a wealth of tools to track companies, from social media platforms such as Glassdoor to satellite services that monitor emissions, not to mention a range of digital tools that can view supply chain information.

As Anne Simpson points out, RIP ESG is not giving up on the shift to "sustainability". Instead, we have to rethink the meaning of ESG, and we need a broader, people-centric approach.