Do well by doing good. That's the trendy, feel-good mantra of ESG (environmental, social, governance) investing proponents. It's much the same claim as electric cars being environmentally friendly. The carbon footprint of an electric car battery is far worse than a gas-powered car's lifetime of exhaust, especially when you consider that coal and natural gas drive the power generation that ends up as the energy source in that battery. A Tesla's "exhaust" is spewed from a smokestack, not a tailpipe. But Tesla has a fantastic ESG score; apparently, the scorers only see that which they want to see.

ESG is a version of "capitalism lite" and is closely affiliated with stakeholder capitalism, where non-owners somehow have a stake or claim in your success. Legendary economist Milton Friedman once said, "A corporation's highest and most moral purpose is to produce a profit for shareholders." This ideology assumes it is moral and legal to provide the goods or services a corporation offers. If not, we have a legal system for making new rules and enforcing old ones. In pursuit of that profit goal, a company will think of the good of their customers and employees and their roles in the company's success. Milton would argue that a company's self-interest is noble because it leads to the optimal outcome for all involved. To over-emphasize the role of non-owners leads to other problems. Paying more for stocks with higher ESG scores will only promote "fudging" of ESG criteria, under-the-table point shaving and a black market for "credits." And imagine the power and temptation allocated to the “Karens” in charge of the scoring system. ESG will only end up trading one form of exploitation for another.

It is true that favorable ESG scorecards are driving current share prices higher. But that outperformance will run its course when the hard facts of economics kick in. It's much like the math of a bond. When you lock in a coupon and market interest rates subsequently decline, price appreciation occurs temporarily. But since the bond matures at par, price increases are fleeting and will evaporate by maturity. Whatever ESG premium may exist, it surely will come at the cost of future results. Compliance with ESG standards comes with costs that will drive down profitability, and with it share prices. First, there are compliance costs; then there are opportunity costs for not investing cheaply in "unfavored" dirty businesses, like oil, chemicals and refining. I have news for the ESG crowd, any product you encounter that provides daily comfort and convenience had oil in its past. Your CO2-eating houseplant was transported by truck, and your brand name spandex was made with oil olefins.

In the end, more money is better than less, and cheaper prices are better for buyers. ESG will fail at upending those basic tenets of economics.

Gil Baumgarten, president of Segment Wealth Management, is a 37-year veteran of the investment industry. In 2010, Baumgarten left the brokerage world to start Segment, a fiduciary firm where the interests of the client and the firm could align. He is a multi-year recipient of the “Top 1,200 Financial Advisors in America” distinction by Barron’s, where he also ranked in the Top 35 Financial Advisors in Texas. His first book, FOOLISH: How Investors Get Worked Up and Worked Over by the System, launched in May 2021 and hit best-seller status on Amazon.