In an earlier post, I covered a Moore Global study claiming that companies with strong ESG performance enjoyed higher profits. If all companies took ESG as seriously as the ESG leaders, their profits would rise by $4 trillion in aggregate.
In that post, I highlighted how Moore Global never actually measured a company’s ESG, rather how important it thought ESG was. It was an example of why a statement is not fact — Moore Global stated that they found ‘Bottom line benefits of adopting ESG practices’ even though they never measured ESG practices.
And that’s not the only problem, hence this second post. Even if the study measured actual ESG, it would only find a correlation — companies that do more ESG have higher profits. But that’s not causation — it doesn’t mean that the ESG caused the higher profits, as implied by the ‘Bottom line benefits’ claim. Perhaps ESG leaders differ in many other ways, and it’s those differences that drove the better bottom line. As my colleague Tom Gosling posted on LinkedIn:
Or do companies that are struggling with revenue growth and profitability deprioritise ESG in favour of shorter-term factors? Or are companies in certain sectors both higher growth and more ESG-oriented e.g. due to the nature of their workforce? Or do managers who devote time to ESG issues justify this by saying it makes it easier to raise capital etc? Taking account of material stakeholder issues is clearly an important part of running a great business, but ‘studies’ that make no attempt to control for relevant factors or to consider the possibility of reverse causality or confirmation bias amongst survey participants do nothing to make the case for ESG.
Let’s take a simple example. Imperial Brands has poor ESG performance because it’s a tobacco company; separately, its stock price has fallen by 40% over the past five years. Tesla has strong ESG performance because it produces electric cars; its shares have soared by nearly 1000%. What would have happened instead if Imperial Brands had embraced ESG as enthusiastically as Tesla? (While it couldn’t change its industry, perhaps it could hire a more diverse workforce or stop its executives from flying.) Would its shares have also jumped by 1000%, or it have captured part of the $4 trillion ESG dividend? Of course not, because Tesla’s good performance is much more due to its industry than its ESG.
Nearly everyone knows that ‘correlation doesn’t imply causation’ — but that knowledge goes out the window if confirmation bias is at play and we like the causation being claimed.