Failing Conventionally: how the ESG gravy train has been derailed

“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
John Maynard Keynes, “The General Theory”, 1936 

We all already know that investors are susceptible to herd-like behaviour: from the South Sea Bubble of 1720 to the “permanently high plateau” for stocks in 1929, and more recently the “dot com” mania of 1999 or of late bitcoin and “cryptocurrency”. These investment bubbles, which always seem easy to identify in hindsight, have always had their messianic talismans and price insensitive believers. 

Man is naturally susceptible to the desire for popularity and prestige. Every new generation believes they will be immune to the irrationality of crowd like-behaviour. Yet time and time again, when an idea is repeated often enough, without explanation or proof, a new mantra will become accepted wisdom. 

If a price of a stock already reflects consensual expectations, then it stands to reason that to be successful over the long-term the first instinct of an investor should be to think about what the crowd is getting wrong. There is a reason why successful investors are often oddball truth seekers rather than natural team players.

Yet too often what passes for financial analysis nowadays is simply a summary of consensus or what the analyst has been told by management. There is limited desire to test widely held beliefs, instead myopic focus on uncovering the latest fad. Economic and market opinions become habitual unless we continue to refresh our minds. 

If we have always been too quick to conform and slow to differ, the fund management industry has in recent years become more hostile to contrarian thinkers, and bizarrely desirous of an agreed industry consensus, manifesting itself in the ESG movement. 

Whilst investing with sensitivity to moral, religious, or political beliefs is nothing new, enforcing those subjective views on the rest of the industry through a one-size-fits-all compliance regime should be anathema to every investor’s instinct to think for themselves. Many fund managers have found it more appealing to build a career from outbidding their peers on adherence to the liturgy rather than their investment performance. 

This mass conversion of fund managers to gravy train evangelism has not only led to a lack of choice for consumers but has undermined the economic rationale for active management. It also means that the investment industry has become a giant Petri dish for groupthink, creating an unquestioning culture that is ripe for a generational misallocation of capital.

John Maynard Keynes – who considered himself a contrarian – similarly criticised the mainstream funds “managed by committees or boards or banks”, reflecting in his “General Theory” in 1936, that the long-term investor: “should be eccentric, unconventional, and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” 

Perhaps Keynes would have recognised that ESG investors, after two heavy years of losses, and now mounting outflows, seem happy to “fail conventionally” today. Almost every ESG stock has either imploded or is in the process of doing so. Ultimately, it seems investors want returns from their fund manager rather than virtue-signalling. 

But why has the ESG gravy train now been de-railed? We were previously told that the energy transition would be economically painless and would mitigate the climate warming up, but irrespective of the latter claim, the market has finally realised that the former was never true. 

UK Prime Minister Sunak recently called for an honest political debate about the economic costs of decarbonisation, focusing on the pace, if not yet the end goal. It is noticeable that rather engaging in a debate that involves cost/benefit analysis, the ESG industry has instead responded by throwing its toys out of the pram. We are constantly astounded that this issue – surely the biggest economic decision of this generation – has received so little critical thought from professional investors whose job it is to subject capital allocation to public scrutiny. 

Our unconventional view is that “Net Zero” will be unachievable without a substantial drop in living standards and consequential loss of geopolitical power. It is also reliant on products like industrial batteries that can store power for weeks and months that haven’t yet been invented and probably won’t be unless the laws of physics and chemistry change. 

Everywhere and always the energy transition seeks to replace an economically superior with an inferior product. Consequently, it requires unsustainable exogeneous factors to sustain it: free capital, from zero interest rates which no longer exist, and ESG investing; government subsidies, which reallocate capital from the productive to the unproductive economy and is therefore not scalable; and command economy coercion, which bans everything that already exists which is more useful. 

Political, taxpayer and investor capital has now run out for ESG. Perhaps it is time for long-term investors to succeed “unconventionally.”

Barry Norris
Argonaut Capital
October 2023

A version of this blog appeared in The Daily Telegraph