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Shopify CEO says ESG is broken and needs a reboot

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CEO becomes latest to speak out against the so-called standards and greenwashing

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Shopify Inc. chief executive Tobi Lütke has joined the backlash against ESG.

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“ESG the idea is really good,” Lütke, chief executive of Canada’s highest profile tech company, tweeted to his nearly 270,000 followers on Nov. 13. “ESG the current implementation is broken, cynical, and counter productive.” He called for a “reboot by people who understand systems design.”

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ESG is an investing strategy that stands for environment, social and governance, capturing three themes that animate those who believe capital should be directed towards companies that are committed to fighting climate change, take stands against discrimination and put in place diverse leadership teams.

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Funds that purport to follow those principles have raised trillions of dollars in recent years, but anecdotal evidence has raised doubts about the thoroughness of the research that determines the companies that are deemed worthy of that money.

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Lütke was reacting to an ESG assessment that gave a higher rankings on leadership and governance to troubled cryptocurrency exchange FTX — which entered bankruptcy protection over the weekend amid reports that a related company was using customer funds and that hundreds of millions of dollars were moved in suspicious circumstances — than to Exxon Mobile Corp.

Companies around the world have been quick to respond to growing investor demand for ESG considerations by proclaiming commitments to “green” and sustainable operations. Meanwhile, regulators have been hammering out detailed requirements that would force corporations to disclose what they are doing to track and control environmental, social and governance risks, including those stemming from financing activities that produce carbon emissions.

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However, a lack of co-ordinated global measurement has led to accusations of “greenwashing,” in which environmental claims are not backed by substantial action, as well as a backlash against corporate decision-making based heavily or even solely on ESG concerns.

Critics of ESG come from both sides of the ideological spectrum.

On one hand, environmental groups and others are stepping up their tactics, with recent complaints to Canada’s Competition Bureau compelling the watchdog to look into ESG claims made by Royal Bank of Canada and the Canadian Gas Association.

And Catherine McKenna, Canada’s former minister of environment and climate change, laid out fresh expectations for companies at the COP27 United Nations Climate Change Conference taking place in Sharm El-Sheikh, Egypt, telling them it’s “time to draw a red line” around greenwashing.

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On the other hand, there has been a growing backlash, particularly evident in the United States, against investing decisions based on ESG factors.

A survey by CNBC in September found that only 25 per cent of chief financial officers supported the U.S. Securities and Exchange Commission’s climate disclosure proposals, while 45 per cent of those surveyed backed moves by Texas and Florida to ban pension funds from investing based on ESG factors.

BlackRock Inc., the world’s largest asset manager, has been involved in a balancing act in recent months, pledging to reject overly prescriptive shareholder climate change resolutions, while also pushing back against Republican attorneys general in more than a dozen states that accused the asset manager of being anti-fossil fuel and undercutting profits in state pension funds as a result of factoring ESG into investment decisions.

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Leanne Keddie, an assistant professor of accounting at Carleton University’s Sprott School of Business, said Shopify’s Lütke “absolutely has a point” in the statement he made on Twitter over the weekend. “Many people seem to think… that somehow ‘good’ ESG leads to sustainability – there is no evidence that I am aware of that that is true,” she said.

“Until people wrap their heads around this distinction, we are going to continue to have confusion on this point. ESG ratings will continue to tell investors about the risks/opportunities they face on ESG topics but not on how a firm contributes towards a sustainable world,” Keddie said.

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A key stumbling block in resolving the ESG debate is the lack of standardized terminology and measurement, say those who follow the issue closely. This appears to have been at the heart of Lütke’s assessment.

“There are many challenges,” said Tyson Dyck, a partner at law firm Torys LLP who specializes in energy, mining and infrastructure and climate change. “Some ESG-related metrics are not easily quantifiable.  Some metrics may be meaningful for some companies but not others. Different companies may face different challenges in collecting relevant data, especially where data comes from third parties.”

• Email: bshecter@postmedia.com | Twitter:

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