“ESG”, Big Finance, and a Category 5 Shitstorm of Economic Reality
DO YOU SUPPORT THE CURRENT THING?
I sincerely hope so, dear reader. I hope you at least pretend to support The Current Thing convincingly enough to keep the wokeratti off your back. Like Havel’s sign in the greengrocer’s window, you are surely basically indifferent to the semantic content of The Current Thing. You pretend because, “these things must be done if one is to get along in life.” Verbally, as Havel observes, whatever the slogan is, it might be more honestly expressed this way,
“I, the greengrocer, XY, live here and I know what I must do. I behave in the manner expected of me. I can be depended upon and am beyond reproach. I am obedient and therefore I have the right to be left in peace.”
There is a crucial difference, however; In communist Czechoslovakia, calling The Current Thing “current” would have been either a non sequitur or grimly ironic. There was only One Thing. Ever. Being an honorary Bulgarian by soon-to-be-marriage, I have a pet theory that this is why communist dissidence was capable of being so powerful and so lasting; grandparents would tell their grandchildren (in secret, of course) what the Only Thing was like back in their day. What they would have given for the excitement of The Current Thing changing every other week!
In Big Finance, however, we find another variation still. More dynamic than communism, less so than social media, The Current Thing Cycle rolls along in more like decades. The reader is probably well aware, however, that this cycle is surely nearing its peak amplitude, which has resulted in many industry participants professing their passionate love for Environmental, Social, and Governance concerns. If they are really gung-ho in their lust to Save The World, it is not unheard of for these (entirely unrelated) concepts to morph, like Power Rangers, into one MegaConcept: the dreaded “ESG”.
I have capitalized the constituent words, and will continue to do so, to emphasize that they are not so much words as slogans. When somebody uses either the words or the Megazord acronym, they are saying the Big Finance equivalent of, Workers of the World Unite! They very much are not using the actual meanings of these words, as we shall see. If you are tempted to begin your fightback by saying something like, “but these are ultimately ethical issues to which it is impossible to centrally deduce or dictate objectively correct approaches …” then I’m afraid you are very much missing the point. Nobody cares, you sweet, innocent child. It’s about power.
This power has become such an obvious problem that people whose politics are defined almost entirely in opposition to the wokeratti have themselves started to rant and rave about globalist plots to turn us all into serfs of the CCP. You know the type — people who oppose The Current Thing. Now, to be clear, opposing The Current Thing is both a useful and a hilarious heuristic. But it is a heuristic nonetheless. It is not an explanation.
One such raving rant of late was delivered by calculating psychopath, rarely if ever right about things far, far in the future, Peter Thiel, at the Bitcoin Conference in Miami.
Amongst other delightful tidbits, Thiel said that when you hear “ESG” you should think “CCP.” While I appreciate employing the shocking and unsettling to draw attention to this issue, I fear that this is unhelpful as an explanation as it conceals the real mechanics at play.
Surely nobody with any shred of self-respect and without any commercial compromise continues to deny that the CCP is evil? But is ESG evil? I wouldn’t want to flatly deny this as it seems to be a slippery slope, but I do think it is a matter of degree. As incoherent as ESG rationale can get at times, I really can’t imagine that it will ever be spun to explicitly sign off on genocide or slave labor, for example (although implicitly, for sure, as we will see below). Herein lies the key to untangling this web of lies: the evil of ESG is Arendtian in its banality. It is teleological, not normative. It is a means, not an end. It serves a seedier purpose.
But what purpose? Or, better yet, whose? Contrary to the ranting and raving in opposition to The Current Thing, I believe the explanation is rather more straightforward. I do not deny that ESG has an obvious political character that is, at the very least, deeply suspicious in its perma-alignment with The Current Thing, and which seems to be taking on a dangerous life of its own. But I believe this is an emergent property that has become attracted to the movement only after it was clear that it wasn’t going away. The purpose it serves is prior to the bizarre emergence of woke capital, and whom it serves are unimaginably more powerful than culture warriors and activists for The Current Thing.
In short, it serves Big Finance itself.
Say what? I thought it was attacking finance! I thought we were cleaning it up and making it moral and making it care? “lol,” said the Scorpion, “LMAO.” If you believe this, I have an NFT to sell you. It’s an NFT of this very Medium post, and it will serve as an excellent reminder of the moment you realized that you have no idea how power works in the real world. Pull up a chair and I’ll tell you a tale before I get canceled and you can only find me on Mastodon.
The revenues of the global asset management industry are almost entirely a function of the volume of assets a given firm manages (or “AUM” for, “assets under management” in industry jargon). Alarmingly little is a reflection of the success with which these assets are managed (or, “performance”). This creates a disastrous principal/agent problem (as if the simple fact of “managing assets” wasn’t bad enough in this respect) in that the motivation of an asset manager is first and foremost to not lose assets to a competitor.
The risk/reward trade-off compels this attitude. If a manager goes out on a limb and does something crazy (like, oh I dunno, invests in something they think is mispriced and is going to go up a lot if provided with capital) there are two possible outcomes: they are right, it goes up a lot, and they get paid a tiny bit more. Or, they are wrong, it goes down a lot, they look like an idiot, they get fired, and they get paid nothing.
This is how we end up with the travesty of passive investing, which, for the layman, basically means, investing in absolutely everything that’s already big. Passive investing is an absolute farce if the goal is, as it really should be, the effective, efficient, creative, and differentiated allocation of capital. I do not exaggerate in the slightest when I say that it is very nearly communist: on the dubious premise that we ought to cut through the noise and the waste of silly old competition, capital is allocated entirely centrally. In a sense it is even cleaner than communism because there isn’t one allocator, or a committee, or whatever; there is zero. The allocation is algorithmic. Companies get capital in proportion to how big they already are, provided they are already pretty big to begin with. Schumpeter would be so proud.
Passive investing is most often celebrated as a marvel of risk/reward packaging for the retail investor, who surely doesn’t have the time or energy to do the job of a professional capital allocator. It’s a fair assumption that they have their own job doing something productive in the real economy. Is this arrangement worth sacrificing? Would sacrificing it be ESG-friendly? Yes, absolutely it would, but we will return to this further down.
Passive investing relies on the notion of an index, or, a numerical weighting of every publicly listed company in a given geography, above a certain size, etc. which is determined by relative size and expressed as a percentage of the whole. If the value of all shares outstanding multiplied by their current market price (or, “market capitalization”) of Company A is 1% of the total of all the companies in an index, then it makes up 1% of that index, and its shares are 1% of those held by a passive investment instrument.
The existence of indices is the bane of the lived experience of investment professionals who take Schumpeter a little more seriously and do not allocate by algorithm but by analysis of business fundamentals. “Performance” is measured relative to an index, on the understandable but perverse realization that index investing, which relies only on an algorithm, is much cheaper for the client. If your non-passive (or “active”) manager returned you 50%, you might think that is fantastic, but if the index went up 60% then you paid for nothing. In fact, technically they underperformed by 10%. No performance fees — even on 50%! — and probably also fired.
This all incentivizes active managers (which, by the way, is a weird euphemism for real investors) not to do well, or even to try doing well — or even to risk doing well — but rather to do as averagely as possible! They need to mimic the tragic joke of passive investing while furiously pretending otherwise for the non-passive fees, and they need to perform as close as they can to the index or else the assets go bye-bye.
The absolute worst thing that could happen to bust this racket wide open would be a real investor, who wants to provide capital to businesses not because they are already big, but because they are small and might get bigger, coming on the scene and making the incumbents look like the parasites they were all along.
If only there were a way to dream up some bullshit compliance costs to keep out such uppity rogues, eh? And can you imagine, dear reader, if such bullshit could be marketed not only without drawing attention to the rent-seeking Cantillionaire privilege it is, but as just and fair and true and good? And can you imagine, dear reader, if this very same just and fair and blah blah blah bullshit could be repurposed to justify otherwise suspiciously high fees on the basis of it being yet more (entirely uncompetitive) “work” everybody in this racket is assigning themselves?
And even if you knew this was complete and utter bullshit, and that being an agent and not a principal ethically and legally precludes you from pretending your politics is your job, can you imagine, dearest of readers, your absolute priority at all times being to appear minimally different to all your competitors and hence to mimic whatever stupid bullshit they are spouting, regardless of whether even a single such spouter is making one iota of sense?
You’ve just imagined ESG.
ESG is a bootstrapped compliance hurdle to keep out, or at least down, anybody ruining the party of the passive cartel by actually investing, consistently outperforming the index, and raising questions about why tens of billions of dollars in fees are going to people who do absolutely fucking nothing for a living. ESG smells like money, and so it follows by syllogism that the vampire squid is relentlessly jamming in its blood funnel. If you think, for example, that Larry Fink gives a flying fuck about climate change, I have an NFT collection to sell you.
But, no, I take it back. These people don’t do nothing. They do less than nothing, because, as is far more popularly commented upon, ESG is flagrantly political, which is what caught the attention of the Oppose The Current Thing crowd in the first place. But these political activists are useful idiots. They are attracted to power, but the power had to first exist as an attraction.
The perma-alignment with The Current Thing is not random, nor should the vacuity of the necessarily capitalized not-words-but-slogans be frustrating if understood in the proper context: it is a charade on the part of Big Finance to assign itself yet more power. The only reason the object of bullshit concern is not The Proletariat is that Big Finance is not (quite) sovereign, still needs to interface with the media establishment, and still exists within a regime in which “the proletariat” is not The Current Thing.
This is how we explain that while surely no industry enjoys being muscled in on by the state and forced to implement politicized nonsense, none of this is a legal requirement and yet Big Finance absolutely friggin loves it.
Nobody cares, you sweet, innocent child. It’s about power.
The activists’ presence and their meddling is an effect, but it is not the cause. It’s just a stupid and annoying effect that requires we capitalize Environmental, Social, and Governance to distinguish the slogans from the words.
As words, these are crucial parts of serious investing. To introduce the most intimidating technical jargon of this post, they represent what financial professionals refer to as: risks. A company that pollutes a river, or oppresses a minority group, or embezzles at the board level, is almost certainly not a good investment. None of this is complicated.
But, hilariously, it puts those who take it seriously in a strange position with respect to ESG: they are increasingly required to explain their “ESG policy” to prospective clients and, in all honesty, there is no politically correct answer. The actually correct answer is, “we aren’t morons,” except they can’t say that because that implies the client is a moron. The intermediary client, that is. One of the many, many, many entirely unnecessary intermediary clients, given no real person with a real job and real savings worth caring about would ever ask such a stupid question.
And if you take a step back, a subtle inference of all of this is that your passive investing megacorp of choice also doesn’t give a flying fuck about pollution, oppression, or embezzlement, but can now explain this away. They have an ESG policy. Look, it’s right there on their website. That’s much better than doing anything.
What might be in this policy, you ask? Well, The Current Thing, naturally:
But if you dig a little deeper, dear reader, you realize just how insidious this is — how evil, even, albeit in about the most banal manner imaginable. Because, recall, this is not their money. This is your money! This is the money of the retail investor who has a productive job in the real economy and doesn’t have time to also LARP as a Master Of The Universe. Do they support The Current Thing?
If they don’t, then I put it to the reader with deadly seriousness that this entire enterprise is criminal. It is a blatant violation of fiduciary responsibility. People should go to jail, and they should share cells with those on lifetime sentences for fraudulently repackaging MBSs and punting the exposure to pension funds with liabilities in the form of retirees of productive jobs in the real economy. How many of those are there, again?
Even if not its root cause, the political character of ESG must still be taken seriously, of course. If the cause is essentially corruption, then the effect of regulatory capture may end up proving even more dangerous still. ESG has undoubtedly become a vector of political attack on the operation of capital markets. If the US wants to retain its prime position as the venue for the leading capital markets in the world, across nearly all asset classes, it needs to surgically remove this cancer as soon as is humanly possible. It is not benign. It is metastasizing.
When SEC Commissioner Hester Peirce voiced the lone dissent against the inclusion of “climate risks” in company prospectuses recently, her argument was basically my own above: these are risks. Although the concept is incredibly technically involved, real investors know how to deal with risks and do not need to be condescended to about which deserve their attention more than others. “We are not the securities and environment commission,” Peirce warned, adding, “at least not yet.” Quite right. I would hope not ever if the rule of law is to be taken seriously, and exactly this kind of regulatory capture via backdoor-compliance enforcement of virtue signaling is to stop.
But could we probe deeper still? ESG is an attack vector, but what is the attack surface? Without intending to be flippant, I think it is centralization. Capital markets are centralized institutions and they are being attacked. So far, so bleak. Can we do anything about it? And what was that Thiel talk actually about, again?
Thiel, of course, was talking about probably the only thing we can do, at this point. He was telling us that Bitcoin fixes this.
Given my entire shtick on the interwebs is to point at random problems and say, Bitcoin Fixes This, yes, here we go. But my shtick is also to mean it! If the reader couldn’t care less, she is free to stop reading now and go back to anticipating the implosion of woke capital. But if she cares about truth, justice, and the American way; if she cares about rainbows and puppy dogs and the proper functioning of capital markets, let me wrap up this post by painting a picture of civilizational ascent. The future is bright. The future is orange.
If you are being honest with yourself, dear reader, and you are not already orange-pilled, and you have a productive job in the real economy and don’t think about all this crap for a living, it is very probably true that the only reason you “invest” in the first place is because of inflation. If money held its value, or even gained value (in line with the weighted-average reinvested return on capital employed, say), then you could decouple saving from investing and rest easy for … well, the rest of your life.
Sadly, this is not the world in which we live. Your money loses value every time Putin invades Ukraine and every time supply chains do whatever it is supply chains do.
If you didn’t realize the prior sentence was a joke, then I’m afraid you aren’t ready, either for the final few paragraphs of this post or for the category 5 shitstorm of economic reality that is gathering on the horizon. Your money loses value every second of every day because it is literally defined as the product of unbacked credit expansion. It is a fungible pan-bank liability matched to the asset of a mispriced toxic loan.
Enders Game - Unchained Capital
For context, the following research piece was written just before the Fed began to unwind its balance sheet (October…
But if, in the highly unlikely but God-damned beautiful event that a form of money was to be invented that obviated this structurally necessary commitment to permanent inflation via neverending debt monetization, global asset management would be positively screwed. The demand for its service in the first place originates from the desperate and perpetual chase for yield that inflationary money inflicts on those further and further from the fiat spigot.
You take that away and the jig is up. Global asset management goes to 10% of its current size, with the difference made up by more local, knowledgeable, and equity-focused skin-in-the-game financing; the kind currently crowded out by the firehose of cronyism on Wall Street that sucks almost everything into its orbit and nudges the rest onto Robinhood and Coinbase.
What’s left will be … actual investing. Allocating capital to investment projects because they are small, mispriced, and stand to get bigger if appropriately financed. And who knows, in doing so they may benefit the environment and society with good or great governance. Lower case, that is, because we speak in English and not in slogans.
If I may be so bold as to quote from my newly released book, co-authored with Sacha Meyers, Bitcoin Is Venice,
Finance as it exists today is a chokepoint for extra-legal and supra-democratic political attack, in the sense of activists pushing high-modernist agendas via the absolute practical necessity for corporations to have at least a commercial bank, if not access to capital markets. The looming threat of regulators, goliath capital “allocators,” or even individual banks cutting off corporations from the ability to finance themselves — with artificially cheap, politically preferential capital or otherwise — is why multinational corporations virtue signal for LGBTQ+ rights in the United Kingdom but dare not do so in Saudi Arabia, and for Black Lives Matter in the United States but conveniently ignore slave labor and genocide in China.
The customer base of Nike, McDonald’s, or whoever, and the beneficiaries of assets managed by BlackRock, or whoever else, may or may not care about these causes. But this doesn’t matter: This is not a clumsy attempt at marketing. Or rather, it is, but the customer is the tax-collecting state, the operationally necessary rent-seeking banking cartel, and the social caste of narcissists that populate both ranks, rotating amongst roles, and from which the decision makers wish not to be excommunicated. It is very much not individual consumers or savers.
This is perhaps the cleanest way of describing how the merchant strikes back. Much of her financial necessities and actions will be entirely within her own control. She will return to a state of having only one customer: the customer.
Bitcoin Is Venice: Essays on the Past and Future of Capitalism
Bitcoin Is Venice: Essays on the Past and Future of Capitalism [Farrington, Allen, Meyers, Sacha, Gladstein, Alex] on…
Do you support The Current Thing? Yes? No? Whatever your answer, great, but go support it on your own. Inflict it on your own customers and see how they like it. Leave the rest of us alone.
Or … get #rekt. The storm is coming, and your slogans won’t save you.
follow me on Twitter @allenf32
Thanks to Sven Schnieders and Nic Carter for edits and contributions.