ESG Insights from a Conch, a Hermit Crab and Nine Books

My 2022-23 holiday week beach reading led me to reflect on the difference between a conch and a hermit crab and the lessons in that comparison for the ESG movement. At first, we may see two living entities inside beautiful shells and treat them as equivalent but there are critical differences. The conch uses its own resources in combination with the calcium carbonate in seawater to produce and grow its shell potentially over decades. The conch creates. The hermit crab scavenges, not simply recyling empty shells but, in many cases, fighting amongst its peers for the most desirable ones and, in some cases, killing a shell’s inhabitants before assuming residency. The hermit crab takes. The nine books I read cast light on how important this distinction is not just for how we perceive the residents of seashells but also for capitalists and capitalism which can either resemble the organically, sustainably growing and strengthening conch shell or a hermit crab’s shell game.

Moving my reflection from the beach to the horizon highlighted the magnitude of the barriers to overcome in order to address grand societal challenges including climate change, inequality and social polarization within the ESG movement. Across nine books, authors relayed case after case in which firms, investors, politicians and consultants owed their success to the ability to take rather than create. They generated wealth by imposing externalities on stakeholders rather than creating value for them. These same actors then used the value they captured to obfuscate, mask, and shield these gains and business or investment practices from transparency and accountability. They built up rhetorical and legal defenses that make such transparency a threat not just to them but to mainstream politicians, business leaders, church-goers and voters. Most perniciously, they have succeeded in perverting the term “free markets” to mean, for some, a market free of transparency and accountability.

This definition of free markets differs dramatically from that of Adam Smith, Friedrich Hayek or even Milton Friedman all of whom recognized the importance for the efficiency of a market system of a well-functioning and resourced state that provided for public goods and the regulation or pricing of negative externalities as well as the “cultivation” of complex systems in which markets play a vital but not independent or unilateral role.

• "The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals” (Smith)
• “Nor can certain harmful effects of deforestation, or of some methods of farming, or of the smoke and noise of factories, be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation.?In such instances we must find some substitute for the regulation by the price mechanism.?But the fact that we have to resort to the substitution of direct regulation by authority where the conditions for the proper working of competition cannot be created, does not prove that we should suppress competition where it can be made to function.”?(Hayek)
• "There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits… so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." (Friedman, emphasis added)

In order to address the current challenges confronting the neoliberal order we need to reach agreement that we should treat differently those organizations, entrepreneurs and investors who assume risks and use resources to create more value some of which they capture from those who merely engage in a shell game profiting from addiction, corruption and the abuse of market or political power that allows them to take from the less powerful. Surely, the vast majority of stakeholders are outraged by those whose wealth came from instead of in service to others. If so, let’s shine the light on the stories such as

• the source of the Koch Brothers wealth: leveraging inherited funds from their father's oil refinery development for Stalin and Hitler to extract, ship and refine oil from the tar sands of Western Canada for sale in the United States while strategically cultivating libertarian policymakers and Christian nationalists who supported their market power at every stage of that value chain;
• the repeated choices of McKinsey partners to create value in tobacco, prescription opioids, South African corruption, Saudi Arabia and Allstate by taking or exploiting customers, citizens and others less powerful than their clients;
• the documented efforts of oil companies – whose own scientists made clear the societal costs of climate change – to undermine efforts at proactive (and now reactive) regulatory or capital market engagement to address global warming;
• the families of corrupt policymakers in the poorest countries of the world who bid up the prices of London and New York real estate or luxury yachts and cars with their illicit gains rather than attend to the needs of their citizens.

Within these pages, however, was not only outrage but also reason for hope. Progress in addressing these cases requires action that enhances transparency and accountability at a system-level. The heroic efforts of Charmian Gooch, Simon Taylor and Patrick Alley at Global Witness motivated by outrage to take action that offered information to markets and policymakers to hold firms accountable has made a tangible difference in outcomes from conflict diamonds to southeast Asian deforestation to African oil. The persuaders profiled by Anand Giridharadas advance by bringing people together rather than dividing them in pursuit of “far-reaching, system-level change and the realization of the promise of democracy...” through engagement in a “politics fierce and unapologetic enough truly to change things and smart and expansive enough to change minds to get there.” It will take many such change agents to overcome the human rights and environmental externalities that riddle the batter supply chain and embrace the increasingly available technological alternatives that could transform this centerpiece of the climate transition in a more sustainable and just manner.

Information on such opportunities will not, however, be enough to generate desired outcomes given the coordinated opposition of those who benefit from negative externalities or the status quo and the politicians who serve their interests by exploiting nationalism, nativism and populism to deflect progressive reform. Research on the best means to combat misinformation, fake news and propaganda highlights the importance not just of explaining the facts but revealing to people that they have been deceived by individuals and organizations who have benefitted from that deceit. Pointing to climate science will not sway climate skeptics but pointing to the oil companies who knew the science and paid politicians and academics to create uncertainty about fact might. Studies on the cost-benefit analysis of environmental regulation will not sway those skeptical of big government but data on the profits earned by the Koch brothers as compared to the health and welfare outcomes of the workers and communities around their facilities might. Progress involves activists like Global Witness , and investigative journalists like Anne Nelson and Geoff Dembicki shining the light on corporate malfeasance and greed which turns an information desert or whirlwind into a clearly flowing river of insight into the source of a company or project’s total value. Once the information and outrage are present, investors, suppliers, customers, communities and policymakers are more likely to act in their enlightened self-interest.

Let us remember the words of Theodore Roosevelt who in a speech on the Kansan site of an 1850 gun battle between abolitionists and slave owners sixty years later highlighted “The man who wrongly holds that every human right is secondary to his profit must now give way to the advocate of human welfare, who rightly maintains that every man holds his property subject to the general right of the community to regulate it.”?That regulation may come from the market and, specifically, ESG investors, who analyze the externalities produced by a company and the likely stakeholder reactions to those externalities and reprice the company closer to its true societal value or from pilicymakers who respond to societal pressures to end the shell game and introduce policies that better incentivize markets to focus on value creation. Either way transparency and outrage will together elicit a response. With increased transparency on firms’ impacts and outrage as to the shell game behind some of the most ardent critics of ESG, efforts to harness the power of business to “solve the social problems incident to our civilization” are more likely to make slow molecular definitive progress. That progress parallels the slow strengthening of the exoskeleton of the conch much more than the agressive scavenging of the hermit crab.

Moises Naim, Mike Forsythe and walt bogdanich , Geoff Dembicki , Henry Sanderson , Anne Nelson , Anand Giridharadas , Quinn Slobodian, Gary Gerstle, Patrick Alley

Revenge of Power, When McKinsey Comes to Town, Petroleum Papers, Volt Rush, Shadow Network, Persuaders, Globalists, Rise and Fall of the Neoliberal Order, Very Bad People