ESG investors and boosters should learn from the FTX collapse, for instance what happens if certain mistruths proliferate, and how an anti-regulation sphere such as crypto assets avoid scrutiny.
An occasional contributor to these pages is Patrick Wood Uribe, CEO of Util, a fintech company which gathers data using machine learning and the UN's sustainable development goals to help investors make more sustainable investment decisions. He writes here about how the collapse of crypto exchange FTX has coloured arguments about ESG investment and finance. Sam Bankman-Fried, CEO of FTX, liked to comment about “effective altruism” and hang out with thought leaders and the like. ESG has already been through a difficult period because of skyrocketing energy prices and claims about “greenwashing” investments.
The author of this article argues that it is unwise to assume that the ESG agenda is somehow weakened or tarnished by FTX’s demise. Instead, he says it is important to be clear about what ESG is about, and to recognise how some of it boils down to PR.
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General rule of thumb: Don’t lie about financial products.
To an extent, the substance of the product doesn’t matter. Neither Crispin Odey nor any one of the BAD- or vce-like funds, explicit in their anti-ESG objectives, suffers the vitriol faced by funds claiming goodness or greenness, only to be unmasked.
Just be honest about it.
The colossal consequences of deception are, unsurprisingly, commensurate with its financial value. In 2008, it wasn’t credit ratings that sunk the reputation of banks: It was credit ratings squared, backed and collateralised. The subsequent crisis of faith rivalled the immediate financial impact, shaping a decade of political polarisation and generational psychology.
Back in May, we talked about the distrust in the context of crypto. Humans don’t need a good reason to bet on speculative assets, nor a charitable ex-post justification, but here it comes: One of the core tenets underpinning crypto culture (anti-regulation, anti-risk management) is symptomatic of distrust in the financial establishment, which is, to some degree, a hangover from 2008.
Takeaway #1: For an ESG industry in the throes of a still-resolvable trust crisis, the crypto complex – generally speaking – is an example of what could happen if certain mistruths are allowed to proliferate.
There’s an existential risk in selling ESG (risk management) as something it’s not (impact). It’s bad for impact providers, it’s bad for ESG providers, and, by extension, it’s bad for the people, companies, and countries who would, otherwise, benefit from genuine ESG or genuine impact. As we wrote then:
Today’s [crypto] market is very different from the decentralised, democratised image it projects. With just a handful of people and centralised exchanges pulling the strings and evading accountability, it’s the type of market begging for risk oversight.
Crypto culture is vehemently anti-regulation and anti risk management. Unfortunately, one result is that there’s little by way of a) scrutiny to prevent the type of apocalyptic crash that hit Terra Luna this month, and b) a safety net to protect those left holding the bag.
If there are more Terra Lunas – and judging by the transparency of certain exchanges and their supposed reserves, it’s only a matter of time – [the distrust death spiral] could have multi-billion dollar ramifications.
Which brings us to Takeway #2: The crypto crash is an example of what is happening because certain mistruths are allowed to proliferate.
There is such a thing as too much honesty. Still, it makes for great entertainment.
Having brought down the crypto house of cards last week, FTX CEO Sam Bankman-Fried (SBF) decided, belatedly and against all possible legal counsel, to share his reflections in the public square. In a Twitter interview with Vox, the self-described “effective altruist” (and de facto flag-flyer for both social impact and crypto regulation) aired his real feelings about ESG (“perverted beyond recognition”), regulation, and ethics and PR.
On regulation (specifically, his own, prior, pro-regulation statements): “[It’s] just PR. There’s nobody out there making sure good things happen and bad things don’t. F-k regulators. They make everything worse. They don’t protect customers at all. [Consumer protection would be good], but regulators can’t do it.”
On ethics and PR (specifically, his own, prior, pro-ethics statements): “All the dumb s-t I said. It’s not true, not really. Everyone goes around pretending perception reflects reality. It doesn’t. I had to be [good at talking about ethics]. It’s what reputations are made of. [It’s] this dumb game we woke Westerners play where we say the right [things] and so everyone likes us.”
Radical honesty might not save SBF (or the lawyers representing him), but for sustainable investors to have on record what so many business leaders think and yet would never say out loud? Invaluable.
Statements about company purpose or ethics are PR. PR is an unreliable proxy for ESG-as-risk and ESG-as-impact. If there were ever a moment to re-evaluate its place in traditional sustainability ratings and analysis, this is it.
Regulation will make certain disclosures easier to digest but not necessarily to trust, particularly where metric- or data-free. Both regulators and companies are responding to growing financial interest in sustainability. The difference is that one is reactive, the other, proactive. The more material [is available on] a corporate disclosure, the greater the pressure on regulators to respond, sure – but equally, the greater the incentive for company management to pre-empt perceptions of any disclosure. Regulatory frameworks are broad and developments slow. Investor relations have the upper hand.
One misinformed rating is a funny meme. Lots of misinformed ratings – bundled and sold as a financial product, let alone bundled and sold as an index on top of which other products are bundled and sold – is an existential risk to sustainable finance.
Even as it highlights flaws in traditional measurement methods, the failure of FTX and the broader crypto ecosystem underscores why sustainability matters. In 2008, credit ratings were accused of lacking rigour, accountability and transparency. ESG ratings need not provoke a similar crisis of confidence today.