The 30 days since publication have more than passed and so I’m posting my joint op/ed with Don Boudreaux here.
‘Air’ Is a Cautionary Tale About ESG
Michael Jordan’s lesson for investors: Avoid uncertainty.
By Donald J. Boudreaux and David R. Henderson
April 13, 2023 at 6:34 pm ET
Some movies not only entertain and inspire but convey broader lessons. “Air” is one of them. The film is about Nike’s efforts in 1984 to secure Michael Jordan’s endorsement of its basketball shoes, which soon after became the iconic Air Jordans. But it also tells anyone who will listen that ESG investing—environmental, social and governance—is a trap.
When the company begins its quest for Mr. Jordan (played by Damian Young), Nike is an underdog. He and his parents are leaning toward a Converse or Adidas sponsorship, as these companies are more established in basketball. Adidas is a front-runner until Nike alerts Mr. Jordan to a problem with that company. Nike’s determined employee, Sonny Vaccaro (Matt Damon) tells Mr. Jordan’s mother, Deloris (Viola Davis), that because the head of Adidas has just died, there will be turmoil at the top of the company that would hurt her son’s interests by creating uncertainty about his sponsorship.
The Jordan family’s meeting with Adidas makes it apparent that the company has no clear leader or vision on how it would deal with Mr. Jordan in the future. This sense of confusion helps persuade the Jordans to sign with Nike, where leader Phil Knight is securely ensconced, ensuring against any radical change of direction in Nike’s relationship with Mr. Jordan.
The Jordans’ decision conveys an important message about investing in companies, especially when it comes to ESG. With uncertainty about who will be a company’s next CEO comes uncertainty about the company’s strategies. Michael Jordan wasn’t willing to invest his personal brand in a fluctuating operation.
Investors should be even more wary when considering companies that pursue ESG. At the time of Mr. Jordan’s sponsorship decision, everyone at least agreed that the lone goal of a company was to maximize value for shareholders. Under ESG investing, by contrast, conflicts arise not only over how best to pursue company goals but over what the goals are. In his 2022 testimony before the U.S. Joint Economic Committee, Hoover Institution economist Joshua Rauh noted that ESG investment “is plagued by inconsistent and changing definitions that ultimately have reduced managerial accountability to shareholders.” Because maximum shareholder value is no longer management’s exclusive aim, managers will wrangle endlessly over which goals to pursue and how to trade them off against one another and against shareholder value. That’s bad for both investors and the economy.
If you watch “Air” for the entertainment value, you’ll enjoy a great story and some inspiration. If you watch as an investor, don’t be surprised if you pass up the next pro-ESG investment opportunity.
Mr. Boudreaux is an economics professor at George Mason University. Mr. Henderson is a research fellow with Stanford University’s Hoover Institution and editor of the Concise Encyclopedia of Economics.
By the way, I saw the movie after we wrote our piece, relying on Don to have gotten it right. He did.
It’s a great movie and only the second one I’ve seen in a movie theatre since Newsom locked down. It’s good old-fashioned drama and they didn’t feel the need to put in a romance when there wasn’t one.
Here’s the trailer, which gave me goose bumps.
Nell Minow, on Twitter, called our thinking “idiotic.” Then she went further, using that oldest of arguments, the ad hominem that doesn’t even fit the facts, suggesting that our research was funded by Koch. I wish. Minow might not know this, but the Wall Street Journal actually pays. Twitter, at least in the use of some tweeters such as Nell, is a vast wasteland.
READER COMMENTS
ee
May 31 2023 at 10:45am
You didn’t convince me there’s a connection between Air and ESG
Jon Murphy
May 31 2023 at 10:58am
The connection is that uncertainity in leadership and goals of a corporation can hinder their ability to compete. In Air, uncertainty led to Addias losing the Jordan endorsement and it instead going to Nike (which was far more stable). With ESG, given how ambigious and often contradictory it is, uncertainty about what it means for a company leads investors and other potential partners to shy away given they don’t know what their future will be.
steve
May 31 2023 at 4:00pm
I didn’t really see the link either. All businesses deal with uncertainty. As the movie noted it hurt Adidas. ESG is an investing philosophy. It might be more ambiguous or cause more uncertainty than some others but I think that is a criticism I have seen leveled by people who dont like it, not based on any real evidence. BTW, that evidence should be easy to gather. Just look at ROIs for companies adhering to ESG compared with competitors who dont. The fact that criticisms never seem to include this data leaves me a bit suspicious. Anyway, if you think it’s harmful then you are looking at free money. Invest in competitors not using ESG. Pretty easy to find lists of companies emphasizing ESG and choose some competitors.
Steve
Jon Murphy
May 31 2023 at 5:57pm
It’s uncertainty in leadership.
David Henderson
May 31 2023 at 7:17pm
When you add one additional source of uncertainty, you get more uncertainty.
Dylan
May 31 2023 at 5:18pm
This is a case that would be really helped by the inclusion of data. ESG has been around for a while, if it is bad for investors, back it up with some data showing poorer returns for ESG companies. As someone that worked at a stock exchange for a couple of years, all I saw was investors clamoring for companies to adopt ESG reporting.
Jon Murphy
May 31 2023 at 5:59pm
Lots of research out there in the business world. Here is just the first link from Google. They fail in achieving financial returns and also acheving their own goals.
Dylan
May 31 2023 at 7:45pm
See, that would have made the WSJ piece much more powerful!
For the record, I did a Google Scholar search looking for performance of B-Corp to C-Corps on the assumption that B-Corps (which have ESG as legally defined goals in addition to profit) would make for a more well defined comparison group of companies that have truly committed to pursue ESG. I didn’t come up with a ton of empirical data though, one study from 2015 that showed B-corps had better revenue growth than their non B-Corp peers. But, my quick look didn’t find any studies looking at investment returns of B-Corps.
The first time this topic came up I did link to the factsheet for the S&P 500 ESG index, which shows out performance compared to the benchmark for every period over the last 10 years.
steve
Jun 1 2023 at 8:49am
It might make it more powerful, or maybe not. In the article Jon cites they go into the reasons why ESG investors might perform more poorly. ESG could provide more uncertainty, but it could also provide more certainty if it provided a focus for investing. The article notes 2 things that, at least, need to be sorted out. First, a lot of companies arent really doing ESG investing while publicly claiming they are, so for those companies we dont know if ESG is a failure. Second, companies that are doing poorly sometimes claim they are now ESG focused hoisting to attract investors that have that as a priority.
Need to have someone look at companies that actually practice ESG and rate their performance.
Steve
Knut P. Heen
Jun 1 2023 at 12:23pm
It is as simple as this: The winner of a marathon is the runner who crosses the finish line first. Suppose we change the rule. The winner is now the runner who also drank some beer during the race. It is impossible to decide who won the race under the new rule without specifying exactly how one beer compares to a later finishing time (for example, deduct ten minute per beer consumed).
ESG is an attempt at removing accountability by replacing a clear goal (shareholder value) with a set of fuzzy goals (ESG). This is a matter of mathematical logic. You cannot maximize an objective function without knowing the objective function. Moreover, suppose the best marathon runner in the world beat me even though he drank beer and I did not. Does that prove that drinking beer is great for marathon runners? No, it proves that a great runner will beat me even when handicapped by drinking. Likewise, some corporations are so successful that they can afford ESG without under-performing their peers. The problem is that the shareholders (VCs for example) invest in portfolios expecting a few winners to pay for all the losers. If the winners waste their success, that will kill the VC-market.
Monte
May 31 2023 at 12:49pm
There’s a strange inconsistency in this woman. In this video clip, she’s accused of sounding like a socialist, yet claims to be “as free market as you can get.” But in the final analysis, ESG investing is antithetical to free market capitalism.
ESG is more about virtue signaling and higher fees for ESG fund managers than it is about being socially conscientious. The irony is that capitalism has the built-in virtue of requiring businesses to do good things for society in order to make a profit.
Nell Minow
Jun 1 2023 at 3:16pm
Thanks for your interest! I am 100% hard-core University of Chicago-trained free market capitalist. I have founded or co-founded five companies and sold three. I worked in Reagan’s Executive Office of the President. Therefore, I believe that when 70% of shareholders vote in favor of a shareholder proposal, the board and executives should respond to the concerns promptly, candidly, and constructively. My perspective is that of the people for whom capitalism is named, the providers of capital, and my work is about reducing moral hazards and agency costs to keep capitalism credible, nimble, and efficient.
Monte
Jun 1 2023 at 6:38pm
Ms Minow,
I appreciate your response and offer my sincerest condolences, as well, on the recent passing of your father.
That said, it’s puzzling to me how a “100% hard-core University of Chicago-trained free market capitalist” can, at the same time, advocate for ESG when it depresses profits, provides no clear metric for success, and has thus far proven to be a mediocre investment. Further, it can hardly be said of ESG investing that it represents the free market at work. You can argue that it’s simply market demand, but the alternate view that “ESG is becoming a dominant force because competition in the investment-ratings business is limited by selective government accreditations and other barriers to entry” is compelling. And you’re no doubt familiar with Tariq Fancy, Blackrock’s former global CIO for sustainable investing, who now warns us that “ESG is a dangerous placebo that harms the public interest.”
I’m sure Blackrock CEO and billionaire Larry Fink feels good about ESG investing (virtue signaling) and ESG fund managers certainly welcome the higher fees they receive in spite of lower returns, all at the expense of the investor. But the most anti-market thing about it, IMO, is the control it vests in elites who presume to tell businesses to submit to ESG or risk losing capital investments or loans whether or not it’s good for your bottom line or your shareholders.
BC
May 31 2023 at 4:15pm
In the last several weeks, the troubles of Bud Light, Target, and the LA Dodgers have shown Henderson and Boudreaux to be a lot more prescient than Ms. Minow. Instead of spending the last few weeks flip flopping on the politics of LGBT, “fratty” customers, parents, and Catholics — angering just about everyone in the process — these firms would have better served their shareholders by exclusively focusing only on following price signals to deliver products that customers want. “Baseball, hot dogs, apple pie, and Chevrolet” never got GM in such trouble.
Nell Minow
Jun 1 2023 at 2:15am
I not only called your piece idiotic, I explained why. I suppose the reason you did not mention that was the validity of my arguments. For anyone who is interested, here they are. Your op-ed shows a complete lack of understanding of either movies or ESG. I never said this specific work was funded by the Kochs. Their influence pervades the work of George Mason and I was taught by the University of Chicago that incentives matter. (For the record, neither I nor my firm have any connection to or revenue from ESG products or providers.) I’m sure you thought you were clever by quoting my father, who death just three weeks ago is still especially painful, but from my perspective, that was far more irrelevant and ad hominem than my comment. I live in the area, by the way, and am happy to meet to discuss this further or speak to your class.
David Henderson
Jun 1 2023 at 4:23pm
You write:
Unfortunately, the link you provided is to to my EconLog post. So no, I still don’t know your argument. But I’m happy to consider its validity. As many regular readers of my EconLog posts will tell you, I rarely fail to mention the arguments of those who argue against my views.
You write:
I agree that you didn’t, which is why I used the word “suggesting.” Here’s what you said:
I think “suggesting” is accurate.
You write:
I did think I was clever, and maybe I wasn’t. It wasn’t an ad hominem, though. I was criticizing the tenor of the comments you made, not your character. And, as I’m guessing you noticed, I did lead in to my comment on your tweet with “Sorry about the loss of your father.”
You write:
I’m guessing that you think I still teach and that I live in northern Virginia. Actually, I retired from the Naval Postgraduate School in 2017 and I live, as I did while actively teaching, in Pacific Grove, California. But if you’re ever out here, I will treat you to coffee.
Dylan
Jun 3 2023 at 5:35pm
Here is the link to Ms. Minnow’s full criticism, for anyone that would like to read it.
Mike
Jun 1 2023 at 11:51am
I agree with your general premise that ESG investing leads to uncertainty of leadership. I don’t agree that it was the message in Air. Yes, there was potentially some uncertainty because of the leadership issues but Nike ultimately won the deal not because of a solid Phil Knight, but because they gave MJ a share of revenue. If Nike hadn’t done so but Adidas did, even with leadership uncertainty, MJ would have been an Adidas athlete.
David Henderson
Jun 1 2023 at 12:22pm
You wrote:
I don’t either. Fortunately, we didn’t say that. What we wrote is:
But it also tells anyone who will listen that ESG investing—environmental, social and governance—is a trap.
So, no it’s not the message.
Mike
Jun 1 2023 at 4:00pm
Poorly worded by me. The message in Air clearly has no relation to ESG. The example about management uncertainty below is what I disagree with: “The Jordans’ decision conveys an important message about investing in companies, especially when it comes to ESG. With uncertainty about who will be a company’s next CEO comes uncertainty about the company’s strategies. Michael Jordan wasn’t willing to invest his personal brand in a fluctuating operation.”
I don’t think the uncertainty at Adidas played much, if any, role in Jordan’s unwillingness to sign with them. So your message about ESG causing uncertainty is correct but this was a tortured example for how to make it. Probably just had to get an article in for your contract though, so no big deal.
David Henderson
Jun 1 2023 at 4:30pm
You write:
I do. Which is why Don and I wrote the article. Think about the scene when they visit Adidas in Germany and there’s that awkward moment when 2 different people claim to be in charge. If I recall correctly, Deloris gives a knowing look as if to say, “Wow, what Sonny told me about turmoil at the top is true.”
You write:
You’re one nasty guy, aren’t you? I have no long-term contract with the WSJ. Like the old Eastern Airlines, I have to earn my wings every day.
perfectlyGoodInk
Jun 1 2023 at 7:48pm
I’m sure everyone here well understands that an externality is a cost not borne by buyers or sellers (e.g., pollution), and which will result in higher-than-optimal production of the good or service in question.
As I see it, there are two main ways we can deal with these:
1) a Pigouvian tax to internalize the externality (e.g., Carbon Dividend)
2) investors choose to invest less in companies that pollute more
While #1 seems more likely to achieve an efficient result, it has the drawback of being a top-down government approach, and I would have expected libertarians and fiscal conservatives would prefer the more decentralized and voluntary approach of #2.
Or am I missing other possible remedies?
Monte
Jun 1 2023 at 10:47pm
3) investors choose to invest more in companies that pollute less (electric vehicles, solar, etc)
I’m not necessarily opposed to any of the 3, or a combination thereof in finding a Pareto optimal solution to the triple threat of government intervention, greenwashing, and companies who choose to prioritize environmental activism over shareholder value.
robc
Jun 2 2023 at 4:30pm
You are missing the other half of externalities: a benefit that isn’t paid for and results in lower-than-optimal production.
Walter Boggs
Jun 3 2023 at 12:03pm
I, too, have been accused of shilling for the Kochs in the past when I’ve expressed an opinion that seemed to agree with theirs. Believe me, the pay for that position is abysmal.
Mary
Jun 10 2023 at 4:50am
I have a degree in Economics from Towson University where I studied under a professor who studied under Milton Friedman at the University of Chicago. I am retired, and I have not focused on ESG investing until the last 6 months. So I am not an expert in it. However, it seems to me that people can get lost in the weeds. ESG investing is simply an effort to interject politics into the economic process and thereby gain control. I think that it is dangerous, and I think that it interferes with the price system mechanisms.
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