ESG compliance on consumer essentials is a policy mistake

While I believe ESG investing should be a personal choice, for better or worse; the practice of ESG compliance as an industry-wide norm is a policy-mistake. The imposition of such a norm especially on essentials like food, retail, and energy, is an inflationary policy with no conceivable upsides for society in general. For more information on the relationship between risk and returns on sustainable and ESG investing, please refer to my video below.

The SEC (U.S. Securities and Exchange Commission) estimated that the upkeep cost of just climate related disclosure activity alone to be USD530,000 per annum. We have to assume 0.5–1% of total revenue of a company goes into paying for the cost for climate-related ESG compliance, as any higher percentages would incur further inflation on essentials. Essentials have long term net profit margin of 5% or less, so it is not like these companies can take a cut in their net profit margin to pay for the cost of ESG without risking these companies to insolvency from typical uncertainties like inventory and currency risks of global supply chains.

By dividing the cost of ESG compliance by 0.5–1%, most companies would therefore need to have a revenue of USD$50–100 million per annum just to be able to afford the cost of ESG compliance that ONLY covers climate disclosure part of ESG. The cost of compliance in social and governance has not even been included yet. If the cost of compliance in social and governance is added, only companies with revenue much more than USD$100 million per annum can afford ESG compliance.

What this means is that very few companies can afford the cost of ESG compliance. For smaller companies to participate, government worldwide would end up subsidising these companies en masse for the cost of ESG compliance. But government subsidies are not free. Either government has to subsequently tax their citizens more, or government has to print more money. Either of which is essentially the same thing, causing citizens to lose real wealth through higher inflation or more income tax. There is no real improvement in the quality of life of average citizen when ESG compliance is implemented on essentials.

We can choose to provide or purchase ESG product and services with our own money, but we SHOULD also have the option to provide or purchase conventional products and services with no ESG compliance. The important thing is that we should let free market decide whether new ESG products and services can thrive against ones without ESG compliance.

If free market leads to a scenario where ESG products and services cannot be commercially viable, both providers and consumers will suffer the economic consequences of ESG compliance. The only ESG beneficiaries are ESG financing like Blackrock, ESG auditors like KPMG, ESG rating agencies like Sustainalytics, and ESG consultancies like McKinsey. But say if free market leads to a scenario where 5% of us are willing to pay for ESG products and services, then let these 5% pay for the rest of these ESG beneficiaries.

In summary, ESG compliance especially in consumer essentials is anything but free market, nor does ESG compliance lead to more efficient trade…

For further queries or advice, feel free to contact me at c.chan@3vs-process.com or chianwenchan@yahoo.co.uk