Yahoo Finance Shopify's Tobias Lütke: ESG is a good idea that's now 'broken, cynical and counterproductive'
Shopify Inc. chief executive Tobi Lütke has joined the backlash against ESG.
“ESG the idea is really good,” Lütke, chief executive of Canada’s highest profile tech company, tweeted to his nearly 270,000 followers on Nov. 13. “ESG the current implementation is broken, cynical, and counter productive.”
He called for a “reboot” by people “who understand systems design.”
ESG stands for environment, social and governance, capturing three themes within the investment strategies of those who believe capital should be directed towards companies that are committed to fighting climate change, taking stands against discrimination and putting diverse leadership teams in place.
Funds managing trillions of dollars purport to follow those principles, but there has been pushback over the thoroughness of the research that determines the companies that are deemed worthy of that money.
Lütke was reacting to an ESG assessment that gave a higher rankings on leadership and governance to troubled cryptocurrency exchange FTX — which entered bankruptcy protection over the weekend amid reports that a related company was using customer funds and that hundreds of millions of dollars were moved in suspicious circumstances — than to Exxon Mobil Corp.
Companies around the world have been quick to respond to growing investor demand for ESG considerations by proclaiming commitments to “green” and sustainable operations. Meanwhile, regulators have been hammering out detailed requirements that would force corporations to disclose what they are doing to track and control environmental, social and governance risks, including those stemming from financing activities that produce carbon emissions.
However, a lack of co-ordinated global measurement, among other factors, has led to accusations of “greenwashing,” in which environmental claims are not backed by substantial action, as well as a backlash against corporate decision-making based heavily or even solely on ESG concerns.
Critics of ESG criteria come from both sides of the ideological spectrum.
On one hand, environmental groups and others are stepping up their tactics to combat what they as as greenwashing — with recent complaints to Canada’s Competition Bureau compelling the watchdog to look into ESG claims made by Royal Bank of Canada and the Canadian Gas Association.
And Catherine McKenna, Canada’s former minister of environment and climate change, laid out fresh expectations for companies at the COP27 United Nations Climate Change Conference taking place in Sharm El-Sheikh, Egypt, telling them it’s “time to draw a red line” around greenwashing.
On the other hand, there has been a growing backlash, particularly evident in the United States, against investing decisions based on ESG factors.
BlackRock Inc., the world’s largest asset manager, has been involved in a balancing act in recent months, pledging to reject overly prescriptive shareholder climate change resolutions, while also pushing back against Republican attorneys general in more than a dozen states that accused the asset manager of being anti-fossil fuel and undercutting profits in state pension funds as a result of factoring ESG into investment decisions.
And a survey by CNBC in September found that only 25 per cent of chief financial officers supported the U.S. Securities and Exchange Commission’s climate disclosure proposals, while 45 per cent of those surveyed backed moves by Texas and Florida to ban pension funds from investing based on ESG factors.
The same month, a report by Thomson Reuters Institute stated: “After a period of ascendancy, the momentum behind ESG initiatives among companies and governments has recently come under strain.”
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Leanne Keddie, an assistant professor of accounting at Carleton University’s Sprott School of Business, said Shopify’s Lütke “absolutely has a point” in the statement he made on Twitter over the weekend. “Many people seem to think… that somehow ‘good’ ESG leads to sustainability – there is no evidence that I am aware of that that is true,” she said.
“Until people wrap their heads around this distinction, we are going to continue to have confusion on this point. ESG ratings will continue to tell investors about the risks/opportunities they face on ESG topics but not on how a firm contributes towards a sustainable world,” Keddie said.
Charles Cho, professor of sustainability accounting at York University’s Schulich School of Business, said a mini-industry has sprung up to measure and catalogue environmental, social and governance impacts, with a money-making motive that hurts credibility.
“ESG ratings have evolved to become a product to sell,” he said, adding that they can be hard to compare, biased and misleading. “So they don’t really mean much.”
This the lack of standardized terminology and measurement, which appears to have been at the heart of Lütke’s assessment, is a key stumbling block in resolving the ESG debate, say those who follow the issue closely.
“There are many challenges,” said Tyson Dyck, a partner at law firm Torys LLP who specializes in energy, mining and infrastructure and climate change. “Some ESG-related metrics are not easily quantifiable. Some metrics may be meaningful for some companies but not others. Different companies may face different challenges in collecting relevant data, especially where data comes from third parties.”
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