By Andrey Dashkov, analyst, Casey Research
It was “the most innovative company,” according to Fortune magazine.
When you hear those words, you don’t expect a company to end up losing 99.7% of its value… and going bankrupt.
But in the late-1990s, that’s what happened to Enron, a corporate superstar that traded energy derivatives.
It was innovative… in its accounting tricks. Enron hid its losses from shareholders, even instructing auditors to destroy their files.
A Securities and Exchange Commission (SEC) investigation started on the suspicion that the company’s profits weren’t real.
When Enron’s shenanigans finally came to light, its share price collapsed from a peak of $90.75 to $0.26.
Why am I telling you this story now? Well, it’s a lesson for investors looking at early-stage trends…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch, we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and John Pangere. And from the founder of our business, Doug Casey.
ESG Is a Massive Trend… And Everybody Wants in
Right now, ESG is a trillion-dollar trend unfolding.
I’ve been talking about ESG for a long time. And for good reason.
With trillions of dollars in sustainable capital ready to finance ESG-aligned projects and companies, there’s an almost infinite supply of money…
…But only for the companies that prove they meet the environmental, social, and governance criteria that ESG stands for.
This creates a huge incentive for companies to present themselves as ESG-friendly… at least on paper.
Make no mistake… a lot of stocks in the ESG space are genuinely trying to be more sustainable.
They work in industries ranging from mining… to industrials… energy… tech… and others.
Those deserve the funding they get, since they do their ESG work in good faith.
But there are others that are not so sincere…
Some companies “do ESG” only on paper. They aren’t as eco-friendly, diverse, or well-governed as they say they are.
They will be the “Enrons of ESG,” and they are sure to lose investors a lot of money.
But today, I’ll show you how to protect yourself from these bad actors.
What Is Greenwashing?
Pretending to be ESG is called greenwashing. This marketing ploy originated in the 1960s. For instance, the hotel industry found a way to lower its laundry costs by asking customers to reuse their towels.
The main motive was to earn a higher profit, not to help the environment.
A more recent example, Investopedia explains, is the oil and gas industry’s attempt to rebrand and rename itself without changing its underlying business model.
A well-known example of greenwashing is Volkswagen… The company cheated on its emissions tests in 2009 through 2015 to make its cars appear cleaner than they are.
It was a major scandal which cost Volkswagen about $35 billion – or about one-third of its total value.
The point is, there will be more “Enrons of ESG” in the future. And you need to look out for them.
What to Do?
The Enron scandal could have been prevented with better board oversight.
That’s the often-neglected “G” in ESG, which stands for “governance.”
Companies with good governance are run by an experienced and diverse board of directors who work for the shareholders.
That may sound like a lot to look out for, but you can do some due diligence based on publicly available information.
The core idea here is consistency. A company that sends all sorts of signals to hit certain hype words like “ESG,” then backtracks, then goes back at it again, clearly doesn’t have good communication between the board and management.
The board should be independent. If there are three members and two of them are the CEO’s relatives, that’s not enough independence.
If board members do outside business with management, that’s also a bad sign. In this scenario, board members will be much more likely to agree with whatever the management says if there’s money at stake.
Long story short, you want a board to be independent and competent. Only then will you avoid putting money into the next Enron.
Fortunately, there are tools online that provide ESG scores, including governance.
You can use it to see how a company you hold – or are considering buying – looks from a high-level perspective.
But it also helps to read through a company’s publicly available SEC filings (easily available through a search on the SEC’s website). This method helps you understand how the board makes its decisions and whether it’s actually aimed at benefiting all stakeholders.
As always, do your own due diligence.
Analyst, Casey Research