NYU Professor of Finance Aswath Damodaran
For celebrated NYU Professor of Finance, Aswath Damodaran, the ESG (Environmental, Social and Governance) investment strategy is nothing short of a scam, and adds no underpinning value to business or investing.

Damodaran, known as the "Dean of Valuation," began researching ESG investing in 2019, puzzled over the Conference Board's promotion of the strategy, he told Patrick O'Shaughnessy, founder of O'Shaughnessy Asset Management, on a recent podcast.

Damodaran said he quickly discovered that none of the claims of adding societal value or improving the Earth, with particular focus on climate change, were true.

"I found no evidence that a company's value was improved or investments in fossil fuels were reduced," he said. "The percentage of energy from fossil fuels has gone virtually unchanged over the past ten years."

An often-cited example is activist investment firm Engine No. 1's pressure on Exxon Mobil to divest itself of fossil fuel reserves, which the company did in 2021 by selling to a private equity firm.

"They are not so much reducing the investment as hiding it," Damodaran said. "Private equity firms have invested $1.2 trillion into fossil fuels over the past decade.

He said that the "Social" aspect of ESG is even more suspect.

"They act like they are the Dalai Lama and Mother Teresa wrapped up in one, that they can identify what is virtuous," he said. "But there is no global consensus for what is good and virtuous. What is good socially for one investor isn't necessarily good for another."

"I would like to be a fly on the wall and hear what these ESG consultants and experts are telling businesses," he added. "I would like to know what I have to do to become more virtuous."

In a recent example of how arbitrary ESG standards are applied, Tesla Motors, the electric car manufacturer, failed to make the S&P 500 ESG Index while Exxon Mobil did. "The S&P ESG indices are broad-based, market-cap-weighted indices designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as their underlying benchmark."

Tesla CEO Elon Musk erupted on Twitter calling ESG a "scam," and quickly felt the wrath of the woke twitterati.

Margaret Dorn, senior director and head of ESG Indices, told Musk that Tesla failed to make the grade because of its "lack of a low-carbon strategy" and "codes of business conduct."

The explanation is specious, Damodaran said.

"What exactly is it about the way Tesla treats its employees keeps it off the list. It's opaque," he said. "It's greenwashing. The difference is that Exxon has learned to play the game."

Finally, Damodaran characterized the research behind ESG as "abysmal," and their recent complaining about how their approach has become politicized only further illustrates that their strategy sits on shaky ground.

"Complaining that the process is political is like a pyromaniac complaining about fire," he said. "They were the ones to first bring the politics to the game."

"The mask is off ESG."