Yet another ESG risk

Since the war in Ukraine started four weeks ago, the EU has sent over 18B Euros directly to Russia.   Here's a real time estimate of these payments:  

The payments are for oil and gas, but in the modern petrostate of Russia the fungible assets go directly to support the expenses of the Putin government, including the military invasion.

Why does the EU, which surely doesn't want to support Putin in this way, continue to send these payments?  Because it needs the oil to heat homes across the continent.  

Europe isn't energy independent for many reasons, including complicated domestic politics on utilities and renewables, and a turn away from nuclear energy.  But certainly one of the contributing factors is the success of the environmental movement, pushed through policy channels and ESG investing.

For the past decade or so, the marginal dollar from a 'socially responsible' investor into Europe focused on reducing carbon production on the continent.  In retrospect, was that the right policy?  Should that still be the goal of ESG investors today?

It seems to me the "E" is now somewhat in opposition to the "S" when accounting for the complexity of the modern world.  Climate goals are clearly important, but so is avoiding war.  

When bombs are actively falling on schools and more than 6 million people are displaced by active war, investors (and policy makers) must consider reducing European dependency on Russian oil and gas, even at the expense of near term climate goals.  So, would a good "ESG investor" now direct funds to new oil and gas exploration in Europe?

I don't know.  But, it is a plausible question, which is the point.

Capital today is - and should be - allocated according goals beyond just profit.  It is a good thing we are in a post Milton Friedman 'Stakeholder' world.  But, we need to acknowledge that adding more goals to capital allocation increases both complexity and subjectivity to investor decision making.  

This is Friedman's point in Capitalism and Freedom, and he is right.  Whose judgement should we follow? Why do we have faith in those decisions? Why are comfortable entrusting investors and managers with more discretion to make allocation decisions across the economy.  

Once we move from the narrow goal profit maximization (within the constraints of the law), we are ceding more power, not less, to business leaders.  Why are we more comfortable with Blackrock fund managers making a decision what is good 'ESG policy' than an alternative political or social processes for resource allocation?

I've written already on the incoherence of ESG investing for public market investors.  We should now add political uncertainty to the long list of concerns for how ESG investing works in practice, not in theory.

I believe we are in a transition state.  We intuitively know that an economy focused solely on profit maximization isn't right. But we lack the language and tools to offer a coherent alternative, where investors, managers, employees and customers can understand complex prioritization processes by business leaders.  The current ambiguity is not only inefficient, it creates a principal-agent problem whereby more power and authority is given to managers.  (A helpful paper - the Illusionary Promise of Stakeholder Governance - here).

I'm interested in models that narrow this gap. I believe pre-commitment devices, and alternative governance models are part of the solution, but would love to hear from others if you are actively writing / building / considering how we move beyond stakeholderism 1.0.  

Returning to shareholder primacy is not the solution.  By neither is the current state of ambiguity, corporate discretion and uncertainty.  We need to chart a path whereby investment decisions can be made with confidence, clarity and humanity.