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Episode Transcript

Before we start today’s episode, an announcement — a birth announcement. There’s a new weekly show in the Freakonomics Radio Network, a show I think you’ll love. In fact, we know a lot of you already love it, because we put out a few pilot episodes earlier this year, and the response was strong. The show is called The Economics of Everyday Things, and it’s hosted by Zachary Crockett. You can get it right now in your podcast app. So go do that. Just look up The Economics of Everyday Things, and follow or subscribe, for free. And now, here’s this week’s episode of Freakonomics Radio.

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Kelly SHUE: My name is Kelly Shue. I’m a professor of finance at the Yale School of Management.  

Some professors want to spend all their time on research. Shue does plenty of research, but she also does a lot of classroom teaching, and she likes her students.

SHUE: I get a lot of research ideas from talking to them, and a lot of insights about how the real world differs from what I’m teaching in class. So I like it when they push back, and they say, “What you’re teaching me is unrealistic, because that’s not how we do it in a firm.”

But sometimes it’s the students who Shue thinks are unrealistic. That’s where she got the idea for a new paper.

SHUE: I was inspired to work on this paper because I was actually just quite annoyed by an argument that I had heard frequently by some of my M.B.A. students, about how E.S.G. investing is supposed to make the world more green.  

E.S.G. stands for environmental, social, and governance, and E.S.G. investing is about allocating resources in a way that makes money while also improving the world. When Shue heard people explaining how it was supposed to work, she couldn’t make the math add up.

SHUE: I’m just hearing this argument over and over again, and in my head I’m thinking, “You know, that violates the basic corporate-finance concepts that I teach in class. I too want to make the world more green, but I don’t think this is going to work.”

Today on Freakonomics Radio: why wouldn’t it work?

SHUE: We’ve looked at what seems to have been a blind spot in the E.S.G. investing movement. 

It’s a huge movement and getting bigger by the minute. Political progressives think it will help save the planet. Republican lawmakers ridicule it as “woke investing,” and they’re trying to ban it. Kelly Shue says that both sides are missing the point.

SHUE: What we’re showing is actually not difficult to prove. It’s right there in the data. It’s just something that, for some reason, hasn’t been looked at before.

All right, let’s take a look.

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Okay, so Kelly Shue argues that investors who focus on the E.S.G. rating of a company or an investment fund are making a fundamental mistake. Before we get into the mistake, let’s hear from one such investor. In this case, the investor is an entire country.

Carine Smith IHENACHO: My name is Carine Smith Ihenacho, and I’m the chief governance and compliance officer for N.B.I.M., which is Norges Bank Investment Management. 

And what does N.B.I.M. actually do?

IHENACHO: I work for the Norwegian sovereign wealth fund. We are a fund for around $1.4 trillion. It’s a fund that’s owned by the government, but in many ways it’s owned by the five million Norwegians

Norway has one of the biggest sovereign-wealth funds in the world.

IHENACHO: Yeah, it’s a lot of money. 

The source of this money is the same as that of many other big sovereign-wealth funds.

IHENACHO: It comes from the oil and gas resources that was found in the late 1960s on the Norwegian continental shelves. And what the government then decided was., let’s take all the revenues from the oil and gas resources and put it in a fund. 

Before oil, Norway was a relatively poor country. Quite quickly, it became rich. In many places, this sudden infusion of wealth has led to trouble — it’s what economists call “the resource curse.” The money might be spent recklessly, or siphoned off by autocrats. But Norway did the sensible thing, essentially putting the money into a gigantic piggy bank: its sovereign-wealth fund. Ihenacho says the investment returns from the fund cover 20 to 25 percent of Norway’s annual budget.

IHENACHO: The fund pays for every fifth teacher, nurse, road that’s being built. I often say it’s easy to be a politician in Norway because they have a free 20 to 25 percent of the budget that they don’t need to find anywhere.

The fund’s investment approach is fairly conservative. Part of that strategy is diversification: the fund owns stock in nearly every major public company.

IHENACHO: Yeah, around 9,000 companies. So we own around 1.4 percent of every listed company in the world.

That includes oil and gas companies, like ExxonMobil and Shell and BP. On the one hand, this makes perfect sense: Norway’s own wealth came from oil and gas. On the other hand, it’s not very diversified to invest in energy firms when all your wealth comes from energy, especially since energy prices can be so volatile. But also: Norway considers itself an enlightened place, a place where the threat of climate change is taken seriously. So, in 2017, the fund’s managers proposed selling off the oil and gas stocks in their portfolio. This led to a good bit of friction, and debate.

IHENACHO: In the end it was decided to sell out of just pure upstream oil and gas producers.

“Upstream” producers being what?

IHENACHO: Being a company that just focuses on exploring for where oil can be, and drilling it up.  

But they kept their investments in the larger, more integrated energy firms.

IHENACHO: So the Exxon, Chevron, B.P., Shell type of companies, continue to stay because they do much more than just upstream production. 

If the Norwegian fund had fully divested from oil and gas companies, that would have meant selling off around $37 billion in stocks. Selling off just the shares of upstream drillers, that was about a $6 billion selloff. And there are some other industries they decided they don’t want to own at all.

IHENACHO: Yes, so coal is a product we are not supposed to be invested in.

Coal being, of course, a particularly dirty fuel. But also:

IHENACHO: Tobacco, cannabis for recreational use, and certain type of weapons. 

They’ve also sold off companies with business models they consider unsustainable, for one reason or another.

IHENACHO: A lot of companies involved in deforestation. Some companies, if they’re reliant on child labor to survive, we don’t think that’s a sustainable business model. 

Every quarter, the fund combs through its portfolio to see if there are other companies they want to sell off.

IHENACHO: We have sold out around 400-plus companies.

This is exactly what E.S.G. advocates would like to see: if a company has a low rating on environmental, social, or governance dimensions, investors should pull their money and put it elsewhere — like, into a company with a high E.S.G. rating.

SHUE: It’s always been strange that “E”, “S”, and “G” are bundled together. 

That, again, is the Yale economist Kelly Shue.

SHUE: Various publications have tried to survey E.S.G. investors to estimate how much they care about the “E” and the “S” and the “G”. And it seems like, these funds on average care 50 percent about E, a little bit about S, and far less about G. So there is a ranking of how much they care about these three letters.

So Shue decided to focus on the “E” as well, the environmental impact of a given firm. She launched a research project with Samuel Hartzmark, a finance professor at Boston College, to analyze what E.S.G. investors think of as green firms and brown firms.

SHUE: So in our research, we categorize brown firms as the firms that are in the top 20 percent in terms of their greenhouse gas emissions per unit of sales. And green firms are at the other extreme. Green firms are the firms at the bottom 20 percent in terms of greenhouse gas emissions per unit of sales. 

Stephen DUBNER: There’s a vast swath in the middle, neither green nor brown. And you’re just leaving them out of the calculation for now, is that right? 

SHUE: We have actually looked at the 60 percent of firms in the middle. We categorize them as neutral. But we find that they are actually much more similar to green firms than to brown firms. So basically there’s about a fifth of firms out there that are responsible for almost all of the environmental impact that firms have on the world.  

DUBNER: Name some brown firms that people would recognize.

SHUE: So they’re active in energy, agriculture, transportation. Names that you might have heard about are Martin Marietta Materials, which is a building-materials firm. Duke Energy, which is an energy firm, obviously. Southwest Airlines, a transportation firm. There’s also Tyson Foods, DuPont, FedEx.

DUBNER: And then name some green firms.

SHUE: Green firms tend to be services firms. So, think Spotify, Prudential, Goldman Sachs, Allstate, MetLife, American Express. Silicon Valley Bank, which recently collapsed, is one of the greenest firms in our sample, which makes sense. How can a bank pollute that much, right?

Okay, so that’s how Shue and Hartzmark categorized the firms. But what, exactly, were they trying to learn?

SHUE: Our research really only looks at two simple questions. The first question is, if you raise the cost of capital for brown firms, how would they react? 

“Raising the cost of capital” is what happens when E.S.G. investors sell off shares of brown firms, and redirect their money to green firms, giving brown firms less investment capital to work with.

SHUE: And the second question is, do brown firms have any other incentives to become green based upon E.S.G. investing so far? What I’ve heard from E.S.G. investors, and as well as from my own M.B.A. students, who are incredibly excited about E.S.G. — they’re very well-intentioned people — they talk about how, by punishing brown firms, that that is somehow going to motivate these brown firms to become more green. So the idea is, if we all collectively choose not to invest in brown firms, then it will be very expensive for them to raise financing and somehow — dot, dot, dot — that’s going to make them more green.

So what actually happens? Shue and Hartzmark recently wrote up their findings in a paper called “Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms.” Let’s start with the green firms. How much are they helped by the extra money from E.S.G. investors?

SHUE: What we found in the data, when we looked at empirically how brown and green firms have changed their environmental impact in the past with respect to changes in their cost of capital — what we’ve found is even if it gets easier for these green firms to access capital, their environmental impact barely changes.

DUBNER: And that’s just because they don’t have much to change?

SHUE: Right. They’re mostly services firms that already don’t pollute. So when they get more money, they continue not polluting. And they’re also not the best candidates for developing green technology because it’s not part of their business model.

DUBNER: But what about focusing investment, let’s say, on green energy firms — startups or otherwise? 

SHUE: I think that’s a very promising strategy, if they were to target their efforts at subsidizing and promoting firms that are developing new green technologies. I just don’t think that describes what the movement is doing right now. There is a part of the E.S.G. movement that I think is quite promising. They usually refer to themselves as impact investment funds. They’re marketed as niche, risky and specialized products, though. These target impact funds, they account for less than about 1 percent of the portfolios invested in E.S.G. 

In other words, most E.S.G. money isn’t going to companies that are developing new green technology; it’s going to firms that already don’t pollute much: like banks, insurance companies, software firms, and so on. And they use that capital to expand their normal, low-polluting activities. And what about the brown firms — how do they behave when E.S.G. investors pull their money?

SHUE: When the cost of capital increases for brown firms, they seem to react by becoming more brown. How do they do that? Well, they continue business as usual, which is brown. Or they might cut some corners on compliance efforts or pollution-abatement efforts. And that’s all going to deliver plenty of cash right now and profits right now. Alternatively, brown firms can choose to become a little bit more green. But to become green, they have to invest in new production methods, new pollution-abatement efforts. So this green investment is going to cost money right now. It’s going to cut into profits this year.

DUBNER: So would you consider it a mistake to not invest more in brown firms? I’ve seen one paper, which I’m sure you know of, called “The E.S.G. Innovation Disconnect: Evidence From Green Patenting.” And the main finding is that so-called brown firms in the energy sector tend to produce the most highly-cited green patents. So are we making a mistake by looking away from the brown firms? 

SHUE: Yes. So I think we’re making two types of mistakes by divesting away from brown firms. The first mistake is exactly as pointed out by the paper you mentioned, which is that if we ignore brown firms, we’re ignoring the type of firm that is actually most likely to develop new green technology that could benefit other firms and could benefit the world. The second reason why I think it’s a mistake to divest away from brown firms, and that’s what the focus of my research is, if you push a firm toward financial distress or raise its cost of capital, that firm becomes much more short-term oriented, right? It’s more worried about its short-term survival. It’s going to care less about cash flow it could gain in the future, because if they’re distressed, they become less future-oriented. And this mistake is actually incredibly costly when you consider that brown firms and green firms have huge scale differences in how much they pollute. The brown firm typically pollutes 260 times as much as a similarly sized green firm. So if that brown firm were able to cut its emissions by just a mere 1 percent, that is actually way better for the environment than the green firm cutting its emissions by 100 percent.  

This mistake, as Shue calls it, isn’t just costly; it’s incredibly common — for reasons having less to do with finance than with psychology.

SHUE: A broader group of investors just don’t want to associate with brown firms. I’m not sure they’ve clearly thought through the impact of their actions, but they just don’t want to touch them. They don’t want to have those firms in their portfolio. 

DUBNER: So you’re saying that E.S.G. investing, as commonly practiced, is less investment strategy and more what some people call mood-affiliation, perhaps? 

SHUE: Yes, I think E.S.G. investing is very much about investors wanting to think that they’re not doing evil with their investment. And because there’s a strong social objective tied to it, I’m not sure that they think through as carefully the steps through which they’re actually going to achieve that objective. 

DUBNER: So, what confuses me a bit is if you look at the stock prices of the big energy firms, for instance, they seem to be doing incredibly well. Now, oil is obviously a volatile commodity, and a variety of things have happened lately to drive up prices. But: if there’s all this E.S.G. movement away from brown firms — and an oil company is the quintessence of a brown firm — why aren’t they being punished more in the markets? 

SHUE: So I take your point that energy sector firms had a very good run. But they perhaps did less well than they would otherwise because of E.S.G. investing. There are a number of estimates showing that already, E.S.G. investing has increased the cost of capital quite a bit for brown firms compared to green firms. The other thing to consider is just the huge amount of money that is right now tied to E.S.G. investing. So there’s a Bloomberg Insights report that shows there’s about $35 trillion globally invested in E.S.G. And that’s expected to grow to about one-third of all assets under management by 2025. So even if the E.S.G. movement hasn’t quite succeeded yet in punishing brown firms, they might succeed in the future because the size of this movement is just growing and growing. And if so, we really have to consider what would actually happen if they succeeded in punishing brown firms.

DUBNER: Okay. But if I’m an environmentalist or an E.S.G. advocate, I could say, “Hey, I’m perfectly comfortable pushing brown firms not just to the brink of bankruptcy, but into bankruptcy. I think that’s what they deserve.” What’s wrong with that argument?

SHUE: So I think there’s something to your point, which is that if we were to punish brown firms to an extreme extent, make it infinitely expensive for them to raise capital, they’re going to go out of business, and if they go out of business, they can’t pollute. The problem is that brown firms exist in a lot of sectors that are actually crucial to a well-functioning society. So it’s not just coal mining, which we might all think of as evil and could be easily replaced. It also includes agriculture, transportation, building materials, natural-resource extraction. So these are sectors that are quite valuable, and I think it would make more sense to try to make these sectors more green per unit of output rather than to say we can eliminate them entirely.

DUBNER: But if I’m willing to no longer, let’s say, eat food that comes from the agricultural sector or move around via the transportation sector or be in a building thanks to the building-materials sector, then I can, with a clean conscience, happily drive the brown firms out of business and not worry about it, right? As long as I’m okay with all that?

SHUE: Yes. If you are willing to purely consume financial and health services and the insurance sector, then we can drive brown firms out of existence, and you would be completely fine. 

DUBNER: So do you suggest that investors — whether individual, institutional, or the investment-firm side — that they collaborate more with brown firms rather than demonize, and not invest in them? 

SHUE: Yes. My analysis shows that brown firms are the firms with the greatest scope to change their environmental impact. So, in addition to investing in brown firms, it might be helpful to engage with their management. I’m a big fan of the efforts of Engine No. 1. What these investors did is, instead of just divesting away or attempting to punish ExxonMobil, they engaged with its board of directors and exerted shareholder pressure for ExxonMobil to change its environmental impact for the better.

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The Yale finance professor Kelly Shue argues that E.S.G. investors have their heart in the right place but often fail the logic test. She says that by simply selling off shares in so-called brown firms, they incentivize those firms to keep polluting. She would rather see investors engage with brown firms, to help make them greener. So let’s hear from one of the rare investors who sees it like Shue sees it. Chris James is the founder and chief investment officer of Engine No. 1, in San Francisco. For years, he ran a huge hedge fund focused on technology. The idea to start a new kind of firm, he says, came from a family dinner in 2019.

Chris JAMES: I always consider myself an environmentalist, and my son called complete bullshit on me being an environmentalist, because I invested in oil and gas. And as I tried to explain how I did both, I realized my answer was just awful. And he looked at me like, with that forehead all wrinkled up like, “That makes no sense.” And so I went back and thought about this.

DUBNER: Was it a kind of Saul-on-the-road-to-Damascus moment, or was this just a natural evolution for you to go from that hedge fund guy to the guy that you are now?

JAMES: I knew that the world was changing — that the investment strategy that had been successful for me for the previous 28, 29 years was not the investment strategy that I felt was going to be successful going forward. 

DUBNER: And can you identify why you believed that?

JAMES: One of the issues was the transparency that we currently had on companies and their impacts allowed us to start to think about how a company’s externalities would affect the long-term business model. So transparency was a function of the digital age, just flat-out, whether it was Glassdoor or just how much information we had on companies.

DUBNER: Can you describe in a bit more detail the mechanisms by which the digital revolution, whatever we want to call it, led to that transparency? 

JAMES: Sure, I’ll take a stab at this. So I do think that the transparency to some degree is a result of the movement towards looking at sustainability as a factor in investing, transparency because of the E.S.G. rating systems. I don’t want to get too bogged down on this, but the criteria or the data sets that have come out of the rating system are a new tool. However, the rating system itself, I’m not a huge fan of.

Let me pull back for a second here. Chris James is saying two interesting things. One is that the E.S.G. movement itself is driving corporate transparency — and most people would agree that corporate transparency is a welcome thing. So, score one for the E.S.G. movement. But he’s also saying that E.S.G. ratings — put out by firms like MSCI, Sustainalytics, and Bloomberg — aren’t very useful.

JAMES: I don’t think there’s any correlation between the multiple rating parties, which means there’s no link between what does “good” or what does “bad” look like.

DUBNER: And why is it so hard to come up with a more predictable, more robust rating? 

JAMES: Well, because each of the companies doing this are trying to create a moat for their own business, and a kind of rating system that ultimately becomes similar to the rating system that we have on bonds. And we’re not advanced enough on the data sets for that to be effective. It is much easier just to say, “Green is good, brown is bad.” I mean, my life would be so much easier if I could just do that, I can tell you.

DUBNER: So, the paper that inspired this episode, by Kelly Shue and Samuel Hartzmark, are you familiar with that paper?

JAMES: I am familiar with that paper.

DUBNER: So here’s a sentence from the first page: “This paper shows that if the dominant sustainable investing strategy of directing capital away from brown firms toward green firms succeeds in changing financing costs, such a strategy would be counterproductive in that it would make brown firms more brown without making green firms more green.”

JAMES: I believe in that thesis thoroughly.  

DUBNER: Here’s more from the paper: “Our analysis suggests that sustainable investing flows and engagement that targets the incentives of green firms would be more effective if targeted at brown firms.” And then there is a footnote that cites your firm: “While engagement is not as common in the real world, there are some notable examples, such as Engine No. 1, which has successfully engaged with ExxonMobil to change its environmental impact.” Let’s get into the details, and unpack this.

JAMES: Sure. Let’s go back to the very beginning, which is how do you choose ExxonMobil as a potential candidate to engage with, to try to drive value creation by making the business more sustainable? When you start looking at any potential activist target, you look for an outlier. And ExxonMobil was an outlier in that they had phenomenal assets, they had phenomenal engineering talent. Yet, they had underperformed, for nearly a decade, their peer group. This was a company who invented the lithium-ion battery, the company who was the first to actually scale solar production. They had incredible engineering talent that could actually bring projects like large-scale carbon capture to market. And so what we saw was a company that, while they had these great assets, you had no one on the board with any energy experience. What it ultimately came down to was a governance issue that existed because there was not anyone with energy experience on the board. They don’t really understand the business.

DUBNER: What is your relationship like with Darren Woods, the ExxonMobil C.E.O.?  

JAMES: You know, we know we have some conversations with senior management team, periodically. But it’s — it’s not — it’s not — we’re not super close.

DUBNER: I don’t have any sense of how much the board matters in a typical publicly owned firm. I see some boards that seem to be total crony, rubber-stampers and some that seem to be incredibly thoughtfully assembled to really try to maximize the goals of the firm. So in the case of ExxonMobil, tell me who was on the board and what were they not doing that you think would have made the firm perform better? 

JAMES: Oftentimes — and this isn’t just Exxon, but many of the large companies — you have the duration that the C.E.O. looks out, very much tied to the duration they think they’re going to be C.E.O. And the board’s role, supposedly, is to pick the right management team and then ensure a great transition and ensure they execute on a long-term strategy. But when you don’t have a particularly strong board, you tend to not have that actually work well.

DUBNER: Let me try to translate that for normal people, if I can. It sounds like you’re saying: ExxonMobil had and has a C.E.O. who’s not very good and who stacked the board with buddies who would let him keep being not very good for the duration of his term? Is that overstating?

JAMES: It’s a little oversimplifying because what Exxon had not done is they had not executed particularly well over the several years that he had been C.E.O. However, if you look at the changes that have taken place inside of ExxonMobil, I would say that management has been incredibly responsive to not our demands, but really what shareholders said they wanted, which is to pivot the business towards, “how do we create value in an energy transition,” as point one. And point two is to execute on the core business as it exists much better. And so both of these things have happened. ExxonMobil has a target of spending $17 billion between 2022 and 2027 on decarbonizing their operations. And so the question is, why can they afford to do this? And the big reason is because they had managed to pay down the debt load that they had. When we started the activist campaign, they had just hit $70 billion in debt, and had to cut back capital spending because they had gone through their own self-imposed limits on the amount of debt they’re willing to have on their own balance sheet. And this was a point made in some of the research papers we’ve spoken about. If the company is in good shape, then they tend to invest in things like decarbonizing their operations because they think that gives them value-creation opportunities. And I think that’s exactly what’s happened here. 

DUBNER: So the more I hear you talk, Chris, it sounds as though your activism against ExxonMobil was not so much decarbonizing per se as governance that would allow decarbonizing. Is that accurate?

JAMES: It was very much a governance issue. I know this is not the picture often painted in the press. If you go back and look at our initial letter that we made public, we ask that the board appoint four people with successful energy experience. We asked them to have disciplined capital spending. We asked them to put together a board committee that would look at the energy transition and the opportunities associated with that. And fourth, we asked them to align the incentives of compensation with value creation, not production growth. There’s nothing radical about those four statements, but what was picked up by the press is then of course, the counterargument by ExxonMobil was that these are a bunch of California liberals who want to shut down oil and gas and have us do wind and solar.

DUBNER: But part of the thrust of your argument is decarbonizing. So how did, or do, you want ExxonMobil to actually do that?

JAMES: What we like to say was the energy transition should move from being thought about as an existential risk to our business to a humongous opportunity for our business. And I can’t stress this point enough, because if you are at a large oil and gas company who has effectively been under attack by most governments, citizen groups, the media, for the last 20 years — you get more and more and more insular. And so I think over time, the insular nature of the oil and gas companies meant that they were not necessarily as open to opportunities outside of the traditional core business.

DUBNER: Here’s what I don’t understand: your firm’s investment in ExxonMobil was relatively tiny, right? It was, like, $38 million or something? 

JAMES: I think, at cost, it was $38 million

DUBNER: And ExxonMobil, gigantic company, the market cap at the time was, what, do you recall? 

JAMES: It was hundreds of billions of dollars.

DUBNER: It sounds to me, as if you’re going to, you know, Harvard and saying, “I’ve got 20 bucks and I would really like you to teach more cooking courses, or whatever I’m into.” Why on earth were you able to create this kind of leverage? Can you tell the story?

JAMES: The story was, we felt that we could bring together a wide group of investors in ExxonMobil. Remember, only shareholders can vote in a proxy contest. So, bring together a wide group of investors around those four points that we made in our letter, that that would be good for them as shareholders. What we felt we could do was bring together people who, frankly, didn’t necessarily care about environmental impact to people that really did care about environmental impact, because the changes that we wanted to make were going to be good for both. 

After Chris James published his letter, calling for changes to the ExxonMobil board, he spent the next few months trying to persuade investors that the new board members he was proposing would make the company more profitable and more sustainable. Then came the day of the board vote.

JAMES: I was incredibly nervous. They had a large number of investment bankers and advisors. we were, I think probably less than 15 people. But I think what we had on our side was a very common sense argument that the changes that we were asking for would be good for all shareholders. And I think that’s how ultimately we managed to win the three board seats.

DUBNER: What have been the biggest changes since this event, with the new board members? 

JAMES: The biggest change is probably starting the low-carbon-solutions business. Carbon was something to be feared and something that was an existential threat to their business model. And today, it’s one of the three pillars of the organization. This is the effort that they’re doing to mostly decarbonize their own operations, but ultimately sets them up to help decarbonize their customers’ operations. And so, that’s what we felt was a tremendous business opportunity, and why you have seen companies like ExxonMobil come out in favor of the Inflation Reduction Act, because it is a business opportunity for them to provide their customers with a lower carbon footprint for the businesses that they operate.

SHUE: It’s quite remarkable that they were able to do this despite owning far less than 1 percent of ExxonMobil shares. 

That, again, is Kelly Shue.

SHUE: So this just tells you that there’s a more direct way of interacting with brown companies that could be more effective and certainly less counterproductive than just seeking to punish them.

We reached out to ExxonMobil, but they declined to comment.

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In a recent research paper, Kelly Shue and Samuel Hartzmark found that the E.S.G. investing movement, despite its good-for-the-planet intentions, doesn’t actually do much for the planet. That’s because the primary E.S.G. strategy is to invest in firms that are already green, and can’t get much greener; and to disinvest from brown firms, which raises their cost of capital and encourages them to make short-term decisions, which often leads to more pollution rather than less. Kelly Shue would like to see E.S.G. investors engage with brown firms rather than shun them; that’s what happened with the activist investing firm Engine No. 1 and Chris James, as we heard earlier. But there aren’t many activist firms pushing in that direction. So how else might brown firms be incentivized to get greener? Well, there’s always government funding — in this case, the Biden Administration’s Inflation Reduction Act, which includes massive subsidies and tax credits to address pollution and climate change. Let’s hear about that path from our next guest.

Tony WILL: I’m Tony Will. I’m the president and C.E.O. for CF Industries. 

DUBNER: Great. CF Industries is what? 

WILL: CF industries is the world’s largest ammonia producer. Some of that we sell on as ammonia. Some of that we upgrade into derivative products. It gets used about two-thirds for fertilizer. We also make emissions abatement, industrial chemicals, and explosives. 

DUBNER: If CF Industries disappeared tomorrow, what would the world look like?

WILL: About 50 percent of the world’s food production is made possible because of fertilizer and seed technology that have been developed in the last, call it 100 years. We represent about 6 to 7 percent of the global nitrogen industry. If we disappeared tomorrow, there might be enough idled capacity to backfill what we currently produce, but it would come at an extraordinarily high cost. So the price of food globally goes up. In addition to that, the production of assets that are currently offline are much higher greenhouse gas emitters than we are. And so not only does the cost of food go up, but the impact on climate goes up as well.

DUBNER: Can you walk me through how your main product is created? 

WILL: You bet. So this is a little bit of chemistry 101. 

DUBNER: I love it.

WILL: We take natural gas, the chemical composition is CH4, that’s methane. And then we mix it with steam, so H2O. And you crack it under very high temperature and high pressure. And so you’re making free H’s, C’s, and O’s. You strip out the CO and the CO2 component, so you’re left with just H’s and N’s. And then you combine those to make NH3, which is the chemical composition for ammonia

DUBNER: When you strip out the CO2, where does that go? 

WILL: Some of it we use to make urea. Urea is the white granular product that maybe people put on their lawns to make it green and grow. The rest of it currently, we vent to atmosphere.

If you’re thinking from an E.S.G. perspective, on the green-to-brown spectrum, CF Industries is a decidedly brown firm. There’s no getting around that. The carbon dioxide they vent into the atmosphere is one of the main concerns of E.S.G. investors. And so, Tony Will says, his firm is looking to stop venting it into the atmosphere.

WILL: I’m very excited to say, we’ve signed the largest deal of its kind, just a few months ago, with ExxonMobil, where we’re going to start sequestering two million tons a year of the CO2 that previously we had been venting to atmosphere. So to give you context on what two million tons a year is, it’s about the equivalent of 400,000 cars on the road a year.

DUBNER: Talk to me a little bit more about the sequestration. I’m curious to know how important the Inflation Reduction Act was in that.

WILL: It’s critical. It’s going to cost us about, call it, $15 to $20 per ton of CO2 in order to be able to condition it, transport it, and inject it into the wells. And then, there’s some cost that ExxonMobil bears as well. We need to be paid for our incremental operating costs, and Exxon does as well. Originally the infrastructure bill provided for a $45 potential credit. 

DUBNER: $45 per what? 

WILL: Per metric ton of CO2. And then the Inflation Reduction Act took that up to $85. 

DUBNER: Wow. So this is a moneymaker for you, theoretically, yes? 

WILL: With appropriate volume, it should be a very attractive return on the incremental money that we’re spending and we’re, you know, doing good things for the environment at the same time.

DUBNER: What are the odds you would have done this without that government subsidy? 

WILL: Well, we made a commitment to decarbonize our network before these programs were put in place. I think the big question, Stephen, is more about timing as opposed to if it was going to happen. I think longer-term, it was going to be a requirement to happen. In other jurisdictions in which we operate — Canada, the U.K. — there are carbon taxes that continue to go up. And at some point, it becomes an economic necessity to do this kind of sequestration with CO2 that we were otherwise venting. But the U.S. has taken a very different approach, which is much more the carrot as opposed to the stick approach.

DUBNER: So, the research paper that this episode is based on, by Shue and Hartzmark, argues that the dominant E.S.G. investing strategy provides weak incentives for so-called brown firms, like yours, to become greener. How does that fit your experience? 

WILL: Well, part of the challenge with the paper, is the way that it defines green versus brown, which is carbon intensity as a function of revenue. So theoretically, that means CF Industries could go out and buy a very high turnover business, like a retail company. And all of a sudden, tomorrow we look much cleaner and greener, even though maybe the emissions profile of our ammonia business has gotten worse. So what it encourages is hiding away high-emissions businesses within portfolios of very large revenue bases. And I think if you really want to get more to the point and sophisticated about these things, they need to be sectoral in terms of the way that you evaluate them.

DUBNER: So one implication from this paper is that so-called brown firms, if they don’t have access to affordable capital in the markets, will stay brown. What’s your take on that?

WILL: I think it really depends upon what the regulatory environment that surrounds you is. Canada has a regime right now where the cost of carbon continues to march up. If you don’t have access to capital and you’re not able to meet it, what you’re really doing is just carbon leakage, which is you’re going to shut those production facilities down, and shift that production to a part of the world with higher emissions profile, which is not good for anybody.

DUBNER: Let’s pretend for just a moment that, you know, this paper that we’ve been discussing goes viral, and a lot of investors — individual, institutional, you name it — say, “Oh, wow, we’ve kind of got it wrong. We’re trying to steer more and more money to these so-called green firms, which are often green because they happen to be an accounting firm or a marketing firm. And it would actually benefit society much more to invest more in brown firms so that they can make their browner processes green.” And all of a sudden, trillions of dollars start flowing toward sectors like yours. If that windfall were real, what would you want to do with the windfall? What would you accelerate in your firm? What would you eliminate? What would you perhaps acquire?

WILL: Yeah, I think what I would hope under that scenario is that the investment dollars differentiate those that have a real plan of action and are taking tangible steps to decarbonize their network, versus those that are just along for the ride. And I think in an environment where dollars did flow to actually help brown firms decarbonize their network, which is good for the planet, I think what that would do is to help us accelerate some of the decarbonization initiatives that we have some engineering solutions for, but we don’t have financial solutions for at the moment.

When Tony Will says there are no financial solutions to fulfill the engineering solutions, that just means that getting greener is too expensive for the company to afford. And that’s why Kelly Shue argues for investing in brown firms that are making an effort to become less brown, rather than punishing them by selling off their shares.

SHUE: We can’t expect brown firms to eliminate or become net zero within the span of a couple of years, which is what green firms are capable of doing. We have to reward brown firms, even if they reduce their emissions by only a couple percentage points. 

DUBNER: But it seems that there is a benefit in punishing brown firms for some investors is it gives them that kind of high moral ground. They may feel better about themselves. They may feel their friends think better of them. If it’s an investing firm, they may get to market their green bona fides. That’s got to be worth something, yeah? 

SHUE: I would hope that once people see my research, and this is part of the reason I very much want to talk about it with you on this podcast, is that I would hope that it becomes less prestigious to do something that can be actively counterproductive.

DUBNER: So you’re arguing that many people have been operating under an erroneous belief in the benefits of E.S.G. investing. What would you say have been the ramifications to date of what you’re calling an erroneous belief?

SHUE: One ramification is that we have about $35 trillion already invested in E.S.G. strategies that aren’t clearly described and don’t have obviously good consequences. And my research highlights a negative consequence. And in the meantime, these E.S.G. investors are paying relatively high fees to fund managers to provide the service. So one downside of this could be that E.S.G.-oriented investors are actually losing money in terms of fees and returns without getting what they desire, which is better environmental impact. 

DUBNER: I mean, when you describe it that way, the word that comes to mind is, like, “scam,” right? People are literally paying a lot of money for something and not getting that thing. Is that too strong a word?

SHUE: I do think “scam” is too hard a word because many of these E.S.G. providers, they are delivering exactly what investors claim they want. I wish investors would think more clearly about why they want this, but investors are saying, “I want you to tell me which firms are green and brown. I want you to help me invest in green firms and avoid brown firms.” There are some investors out there who say, “I want to hurt brown firms.” So now A.Q.R., which is an investment management company, and others, have developed long-short funds. What these funds do is they long firms that are green, and they short — so they actually bet and try to hurt — firms that are brown. And I don’t think they’re scams. They’re just responding to investor demand.

DUBNER: But if I were smart, and I believed in the long term, and I believed in the research of Kelly Shue and Sam Hartzmark, I might want to short the A.Q.R. long-short fund, yes?

SHUE: I’m not sure. You know, that’s assuming that thanks to my research and this Freakonomics podcast — thank you for covering our research — that we actually dramatically change the preferences underlying a $35 trillion movement in the next couple years. That’s what it would take for your bet to pay off. 

DUBNER: So you’re saying that my belief in our own power is probably 10X your belief in your ability to change the market. 

SHUE: Yeah. I mean, that has been a finding throughout the behavioral economics research. People think that they matter more than they actually do, and they’re more optimistic about their ability to effect change than in reality. 

DUBNER: And when you say “people,” you weren’t describing academic researchers, I assume. But what about that? How much do you expect that your research is going to change the reality? 

SHUE: Oh, I think I’m already irrational in that I’m more optimistic than I should be. But I don’t think I’m as optimistic as you.

That, again, was Kelly Shue at Yale. Thanks also to Chris James of Engine No. 1, Tony Will of CF Industries, and Carine Smith Ihenacho from the Norwegian sovereign wealth fund. You know what they all think about E.S.G. investing; I’d like to hear what you think, having heard this episode. Our email is

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Freakonomics Radio is produced by Stitcher and Renbud Radio. This episode was produced by Ryan Kelley and mixed by Greg Rippin, with help from Jeremy Johnston. Our staff also includes Alina Kulman, Daria Klenert, Eleanor Osborne, Elsa Hernandez, Emma Tyrrell, Gabriel Roth, Jasmin Klinger, Julie Kanfer, Katherine Moncure, Lyric Bowditch, Morgan Levey, Neal Carruth, Rebecca Lee Douglas, Sarah Lilley, and Zack Lapinski. Our theme song is “Mr. Fortune,” by the Hitchhikers; all the other music was composed by Luis Guerra.

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Here’s a sample of our newest show, The Economics of Everyday Things. I hope you like this show as much as we do, and I also hope you’ll immediately follow it in your podcast app.

When you go to a baseball game, there are a few things you can count on. You’ll hear the vendors hollering over the din of the crowd.

VENDOR: Crackerjack!

You’ll smell the peanuts, the hot dogs, the ludicrously overpriced beers.

VENDOR: Peanuts!

And, if you’re at Citizens Bank Park in Philadelphia, you’ll see a six-and-a-half-foot-tall fuzzy, green beast, waddling across the field in search of trouble. Even if you’re not a sports fan, you’ve probably heard of the Phillie Phanatic. Sports Illustrated called him the best mascot in history. He has sold millions of dollars’ worth of merchandise and he brings families to the ballpark at a time when fewer people are going to baseball games. How exactly does he do that? Well, it has a lot to do with the guy who originally wore the costume.

Dave RAYMOND: I could throw, I could catch, I could do cartwheels — not a lot of gymnastics, but I could dance, I could move really well. I kind of fancied myself as being the secret weapon.

For the Freakonomics Radio Network, this is The Economics of Everyday Things. I’m Zachary Crockett. Today: sports mascots.

The “secret weapon” you just heard from — that’s Dave Raymond. His story starts back in the late 1970s. As a sophomore in college, he landed a summer internship with the Phillies.

RAYMOND: I was in the promotions office and, you know, my dad had said, “Look, when you get this job you do whatever they ask you to do. Don’t say no to anything.” So I was stocking shelves, I was cleaning bathrooms up in the executive offices, and then I might be taking the national anthem singer to dinner. But that all changed in the Spring of ‘78.

At the time, the Phillies had a problem on their hands: attendance wasn’t too hot. And the promotions department was trying to get more butts in the seats. On the other side of the country, someone had an intriguing solution.

ANNOUNCER: More chickening around here as we go to the bottom of the sixth inning. The famous San Diego Chicken changing dancing partners here…

Out in California, a 20-year-old kid named Ted Giannoulas was making waves at San Diego Padres games by dressing up as a chicken and cavorting around the field.

RAYMOND: The chicken kind of had a raunchy routine. He actually chugged beer through his beak. This chicken character is just out of his mind. And people are actually coming to the game because they’re hearing about him.

Professional sports mascots were not a new idea. The Phillies even had their own — Philadelphia Phil and Philadelphia Phyllis, a pair of twins in Revolutionary War outfits. But they weren’t designed to entertain.

RAYMOND: They were more like walking logos or symbols. The performer would wear these big heavy body suits made out of some pieces of wood — they had no mobility.

The Phillies saw the impact that this chicken was having in San Diego, and they decided to up their mascot game with a new character. So they went straight to the best people in the business.

ERICKSON: My name is Bonnie Erickson, and I was the designer of the Phillie Phanatic.

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If you want to hear the rest of this episode — and more episodes of The Economics of Everyday Things — just search for the title in your podcast app, and follow the show. As always, thanks for listening.

Read full Transcript


  • Chris James, founder and chief investment officer of Engine No. 1.
  • Carine Ihenacho, chief governance and compliance officer for Norges Bank Investment Management.
  • Kelly Shue, professor of finance at the Yale School of Management.
  • Tony Will, president and C.E.O. for CF Industries.



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