Essays claims pursuing ESG goals will damage the Canadian economy
ESG investing has become a more divisive topic in recent years, driven by a significant backlash in the United States, but also due to uncertainty and often inadequate data.
While Canadian investors appear more interested in ESG and sustainable investing, scholars from Canada’s Fraser Institute question the validity of pursuing ESG goals and argue that doing so is both damaging to the Canadian economy and does not reflect how the markets work.
In one essay - It’s Time to Move on from ESG - resident scholar Steven Globerman says that the ESG movement fails to deliver on its promises.
“Investor support for ESG is starting to wane, which isn’t surprising as the considerable harms ESG mandates pose come to light,” he said.
Globerman says that ESG-branded investment funds do not perform better than conventional investment funds, companies that proclaim to pursue ESG-related activities are not more profitable than companies that do not, and mandating ESG-related corporate disclosures imposes additional costs on public companies and diverts resources away from productivity-enhancing investments, harming workers.
His essays states that the claim that ESG initiatives enhance corporate profitability is not consistently supported by academic research and that the push for mandatory ESG disclosures is seen as costly and potentially discouraging companies from going public.
It also says that the focus on ESG may undermine the efficiency and wealth-creating potential of the private sector and suggests that competitive market forces and consumer behavior are more effective in addressing environmental and social concerns than top-down ESG mandates.
Market functions
Meanwhile, another Fraser Institute essay - Putting Economics Back into ESG - written by Jack Mintz and Bryce Tingle of the University of Calgary, says that the way ESG is being pursued in Canada is incompatible with economic principles and how markets actually work.
They believe that ESG mandates will:
- discourage new businesses from locating in Canada
- make investors reluctant to invest in Canada
- make Canadian companies less competitive than their international peers
- see capital leave Canada for jurisdictions without restrictive ESG mandates
- mean economic growth will slow and workers will suffer as a result.
However, if ESG mandates and definitions are expanded and a more balanced approach is adopted, then the authors say the harms will be minimized.
They recommend:
- Expanding ESG to Include Economics: ESG should consider economic impacts to avoid harming corporate profitability and market competitiveness.
- Limit Regulation: The authors recommend that securities regulators avoid regulating political matters under the guise of ESG, which they argue is beyond their expertise and mandate.
- Address ESG Fraud: Companies making false ESG claims should be prosecuted, and liability should be imposed on the use of flawed ESG ratings.
- Regulate Proxy Advisors: Proxy advisory firms, which influence corporate governance through voting recommendations, should be regulated to ensure their decisions align with economic realities and shareholder interests.
“There is no reason to believe that managers and business executives enjoy any comparative advantage in identifying and implementing broad environmental and social policies compared to politicians and regulators,” said Globerman. “The evidence is clear—the private sector best serves the interests of society when it focuses on maximizing shareholder wealth within the confines of the established laws, not complying with top-down imposed ESG mandates that will harm the economy and ultimately Canadian workers.”
The essays are sure to fuel debate among those that are strong proponents of the ESG movement and those who are either skeptical or against.
