A Sustainable Future: Prof. Alex Edmans, London Business School, on Why Sustainable Investing “May Contain Lies”

 

How prevalent are psychological biases like confirmation bias and black-and-white in your thinking? Listen to Jason Mitchell discuss with Professor Alex Edmans, London Business School, about why misinformation is a problem that affects us all; how we can counter it through more critical, rigorous analysis; and what it means for the world of sustainable investing.

Recording date: 14 April 2024

Prof. Alex Edmans

Alex Edmans is Professor of Finance at London Business School. Alex serves as non-executive director of the Investor Forum, on the World Economic Forum’s Global Future Council on Responsible Investing, on Royal London Asset Management’s Responsible Investment Advisory Committee, and on Novo Nordisk’s Sustainability Advisory Council. Alex’s book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit, was a Financial Times Book of the Year and has been translated into nine languages, and he is a co-author of Principles of Corporate Finance (with Brealey, Myers, and Allen). He is a Fellow of the Academy of Social Sciences. His latest book, May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases – And What We Can Do About It comes out in April 2024.

 

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

 

Jason Mitchell:

I am Jason Mitchell, head of responsible investment research at Man Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow. Hi, everyone. Welcome back to the podcast, and I hope everyone is staying well. So I've looked forward to this episode and the launch of Alex Edmans new book, May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases - And What We Can Do about It. For a while now, because Alex, as many of you are well aware of, is a force of nature. It's also worth adding that behavioural psychology and economics are big interests for me. So I see this as a natural continuation of the other podcast episodes we've done with Anna Rosling's Factfulness, Vaclav Smil's How the World Really Works, and an upcoming episode with Dan Ariely on his new book, Misbelief: What Makes Rational People Believe Irrational Things.

So there are two sides to this episode with Alex. The first in my mind really goes after the big epistemological issues and sustainability, not just in the way we frame them, whether it's ESG or Alex's proposed term rational sustainability, but it's also about how we conduct rigorous research and interpret its findings with integrity. And the hard truth here is that practitioners without an academic peer review process of their own are often at fault of the worst biases. And here's where Alex provides a powerful roadmap for distinguishing fact from fiction. But there's also another side to this episode that's about the emergence of a troubling cancel culture that diminishes the space for constructive discourse. In short, I thank Alex for joining this episode and for discussing some challenging topics like his pushback to recent pieces of diversity research, his choice of platforms like Strive to discuss them, and criticism about financial academia's own faults.

True to his written word, he very much engages. So it's great to have Alex Edmans on the podcast. We talk about why misinformation is a problem that affects us all, how we can counter it through more critical analysis and what it means for the world of sustainable investing. Alex is professor of finance at London Business School, Alex serves as non-executive director of the Investor Forum on the World Economic Forum's Global Future Council on Responsible Investing, on Royal London Asset Management's Responsible Investment Advisory Committee, and on Novo Nordisk's Sustainability Advisory Council. Alex's last book Grow the Pie: How Great Companies Deliver Both Purpose and Profit was a Financial Times book of the year. Welcome to the podcast, Professor Alex Edmans. It's great to have you here, and thank you for taking the time today.

Alex Edmans:

Well, thank you so much for the invitation, Jason. Really looking forward to our conversation.

Jason Mitchell:

Absolutely. Absolutely. So let's jump in. So, Alex, let's start out with an overview of your new book May Contain Lies: How Stories, Statistics, and Studies Exploit Our Biases. Can you lift the texts off the paper and book really and give us some context what provoked the ideas behind the book? Let's start there.

Alex Edmans:

What provoke this was me using academic research for practical problems discussing the findings of research with executive and investors and policymakers. And what struck me with how people would respond to the research depended largely on whether they like its findings, not its methodological accuracy. So if it was the paper which occurred in with their viewpoint, it was the world's best paper. And if it was the paper that contradicted their viewpoint, it was seen as an academic paper with no relation to the real world. So it was about how we respond to a message based on its appeal, not it's accuracy. And the more I dug into this, this is not just a problem in my home turf of economics and finance, but in many other field such us politics or science or health advice.

Jason Mitchell:

I'm also curious, how do you see it fitting into this tradition of behavioural literature? I'm thinking of Daniel Kahneman's Thinking, Fast and Slow, Hans Rosling's Factfulness, Vaclav Smil's How the World Really Works, and Dan Ariely's book Misbelief: What Makes Rational People Believe Irrational Things. I want to point out that I actually really care about this area and have done or will be interviewing Roslyn, Vaclav Smil, and Dan Ariely as well on this.

Alex Edmans:

So I think the [inaudible 00:04:41] is just fascinating. And so what it points out, and given, unfortunately, you can't interview Kahneman but you're interviewing the others, let me highlight the relevance of Kahneman's work. So what he talks about are two modes of thinking. There's the system two mode, that's the rational mode. That's the one based on data and evidence and reasoning. And there's the system one, and that's the impulsive mode of thinking which is run by the amygdala rather than the prefrontal cortex. And how this fits into my work is rationally, we know how to deal with data. We know that we should check the facts. We know that a single story might not be representative, it might be cherry-picked, and we know the difference between correlation and causation.

And indeed, if I or anyone else shares on LinkedIn a study which might go against the grain, there's no shortage of comments as to why this study might have holes in it. Again, it could be reverse causality or omitted variables. But problem is that when we have confirmation bias, when there's a bit tickle of you that we want to support, we have the system one in operation. In particular, if there's a flimsy argument or a flimsy paper, but we like the conclusion, we will accept it no questions asked.

And so what I wanted to highlight is a couple of things. Number one, how our biases cause us to fall for misinformation even if the problems are as clear as they. But number two on a more constructive and positive side, how the solutions are within us. You don't necessary need to get a PhD in statistics to be able to disentangle fiction from fact. I don't have a PhD in statistics. In fact, you just need to use the same discernment but you already able to deploy and use when you see a study who's conclusions do not occur with your world view.

Jason Mitchell:

The fact that the title of your new book contains the word lies, in my mind is particularly provocative because it carries, I guess, certain nefarious connotations. So is this work about poor, but well-intended approaches to research and the application of research when we think about biases and the lack of the scientific method, or is this about something else? Is it about agency problems? Is it about mis-selling and intentional greenwashing?

Alex Edmans:

I sense about all of the above. So you're right, Jason, that normally lies is reserved for something pretty inflammatory. So to call somebody a liar or to say somebody has lied, that is a big accusation there and normally is reserved for something which is flagrant and can be convincingly debunked. So you could lie by claiming that the rocket bomber is not a US citizen, that can be debunked by providing his birth certificate. Although, what I wanted to highlight is simply the opposite of truth. I wanted to broaden the reader's understanding of what it means to tell untruth/lies. It could be that what you tell is 100% accurate, but it's misleading because it's one cherry-picked example. Or maybe you have an accurate correlation across hundreds of data points, but that is still misleading. Why? Because correlation is not causation.

So we know the eight concern of being in a [inaudible 00:07:59]. Well, know to check the facts and any reader would know that before reading the book. What I wanted to highlight is we need to go beyond that because the ways in which we can be deceived are not just untruth being told to us in the form of outright lies, but also the form of [inaudible 00:08:14] and it's on those higher level concerns that I wanted to enlighten the reader.

Jason Mitchell:

Why does sustainable investing, ESG, seem especially prone to the narrative fallacy problem and biases you write about? Is it because it's a more nascent industry? And I guess, how are the stakes higher, I guess in this regard? After all, writing about diversity or the impact of climate related stewardship or the just transition, all these carry certain political policy implications and seem very different or more charged than academic topic like quantitative finance or writing about the factor zoo.

Alex Edmans:

You're right, Jason. I think there's two reasons why the concern that I wrote about might be particularly prevalent in sustainment investing. The first is that people wanted to be true and wanted to true quite passionately. So if you're a supporter of ESG, you'd like to believe that companies the emit more carbon perform worst, because you think it's a really bad company that doing bad things towards the society. We just hope that they get punished in the form of worst financial performance.

We might also think about this with diversity. We believe that diversity is a good thing, and so if studies come out showing that diverse companies perform better, that's something which strongly [inaudible 00:09:38] world view. So given that there's so beliefs, then if you like to study which reinforces that conclusion, people are even more willing to light it up even if the mistakes are even more basic than from the standard paper. And in contrast, if you're somebody who opposes this, people might impune other motives so they might say that you're racist or a sexist if you were to [inaudible 00:10:05] there some holes on the [inaudible 00:10:06] research or you might be a climate change denier if you're to point out that sometimes emitting companies might perform better rather than worst. It is a lost of ideology put into this which you might not get into what academic topic like the factor zoo.

The second reason why there might be a concern is that there's so many ways to measure ESG. And so the ability to mine data for a result that you want is pretty large. So we could take ESG ratings, and the ratings don't always agree with each other. In addition to the ratings, we can decompose it into individual components of E, and F, and G. With an E, there's lots of dimensions of environmental performance. And also, if we want to correlate that which a certain outcome, let's say the impact of ESG, there's different ways that you can measure impact. Sometimes, actually measures of impact are not actually impacts but disclosure, as your podcast with Tom Gosling highlighted. So there's so many ways that we can measure the input, ESG, the output, reader's performance, or impact that it's almost always possible to come up with a relationship which shows what you want to show.

Jason Mitchell:

Yeah. It sounds like a pretty powerful argument for why sustainable investing needs to become much more quantitative and less qualitative. I guess, I've always thought or talked about this idea of, is ESG, is it process or Premia process? Everything has a process, but Premia tends to be a bit more quant or rigorous in its focus. It moves away from this qualitative narrative reporting, this storytelling.

Alex Edmans:

I still think there was a value to qualitative aspects because there's many dimensions of ESG which you might not be able to encapsulate with numbers. So if we go back to diversity, equity, and inclusion, yes, you can measure demographic diversity, but just like captured cognitive diversity or the fact capture the inclusiveness of a [inaudible 00:12:05] culture.

So I do think there was role for qualitative research. But absolutely agree with you, Jason, that that needs to be rigorous. In particular, if you want to try to assess something qualitatively, we need to try to make sure it's not prone to the halo effect. It's not reported by other people based on other dimensions. So as an example of that, there was the [inaudible 00:12:27] firms or endearment which try to show that there's a payoff too conscious capitalism. And so what they had to do was identify companies that practise conscious capitalism which they define as putting the needs or views of stakeholders about shareholders.

And to do this, they ask groups of MBA students, "Tell me about companies that you love, not just like that love." And so somatically, that will get to successful companies. So Amazon was on that list. Amazon is a loved company because it's highly successful. Maybe people are questioning its sustainability practises, but the fact that its seen as a successful company means it's a loved company. That's the example of halo effect where what you're measuring is not actually sustainability but performance, and so if you show that it's linked to performance, that's not too surprising because your measure of sustainability is basically a measure of performance to begin with.

Jason Mitchell:

Yeah, I've read the book. It's a clever title. Many of the problems you've written and talked about are non-academic or practitioner facing. The anecdote about the witness from the Trades Union Congress mischaracterizing research in the UK House of Commons in your book, the UK Financial Reporting Council's, Weak evidential support for the Financial Efficacy of Diversity, the BlackRock paper on diversity, I guess, is this a practitioner problem at its root? Either not writing papers that are up to academic standards or misinterpreting data and academic work.

Alex Edmans:

I think it is largely. So certainly, academics are far from perfect, and I'd be very happy to talk about that subsequently. But when you think about practitioners, they go might be something other than scientific research. So if you think about BlackRock, there are fantastic asset and [inaudible 00:14:19] some of their funds. If you think about Mackenzie, their premier management consultant that able to advice companies on their biggest problems.

However, that is very different from scientific research showing a relationship between two factors and trying to rule out emitted variables or [inaudible 00:14:37] that something that you need scientific research credentials to do just like you wouldn't really trust the pharmaceuticals' company to do a clinical trial necessarily on their own drugs. Why? Because it's a particular outcome they want to find. You like some independent research scientist to do that.

And so when they have this papers, these papers might be engaging in advocacy, not research. So why I mean by this is a particular result that you want to find and therefore, you will give whatever specification or set of variables that give you that particular result. So why is it that these organisations do research to begin with? Because you might think the reason is that giving away knowledge for free rather than having clients pay for this in terms of consulting, this is often brand building, and if you see at the end of these reports, it sometime says, "This is a marketing communication." And that's how it should be read by a discerning audience to recognise that if this is a marketing communication, there might only be a particular result that is going to be selling.

In contrast with academics, at least some, not all, they are happy to find whatever the data shows. And many, again, not all top journals will be willing to publish whatever result is supported by the data and there haven't [inaudible 00:15:59] academic papers which have gone against the grain and shown results which did not occur with this [inaudible 00:16:05] of the time.

Jason Mitchell:

You clearly hold the academic peer review process in leading academic journals in very high regard. I recognise that. That said, there have been quite a lot of cases in the ESG space recently where papers that were previously thought to be authoritative were not. Examples include the work of Andrew King and Luca Berchicci, finding various papers by George Serafeim, Mozaffar Khan, Aaron Yoon, Bob Echols, Janis Janu to be flawed frankly. A lot of these academics have been, I think viewed by many practitioners is frankly titans of the ESG world. So is the academic peer review process, is it fundamentally flawed? And how much comfort does publication in a top academic journal really provide?

Alex Edmans:

I think the academic peer review process is good but it's far from perfect. And therefore, publication and top journal provides some comfort but not completely comfort. So let me start with the pros of the academic peer review process, this is at least in fairy training to make sure that you have nailed the result, give a [inaudible 00:17:12] of excalation. And so there is a large degree of confidence in the findings. And so the example of when as well. My paper linking employer satisfaction to long term stock returns. When I try to publish that, it was eventually published in 2011. This was at the time where there very few papers on ESG. There was no real drive to publish ESG papers, so they helped me to a very high standard [inaudible 00:17:40].

So they are as well employee satisfaction, that cause is higher financial performance, or is that financial performance that causes high employee satisfaction. Is it something else like industries which lead to both satisfaction and performance. But they also few other concerns at me which is could it be ESG funds by a company once it's listed in the best companies to work for and that prices pressure causes the stock price to go up. So how did I address that concern? I had to gather the names of every single fund within ESG mandate, and then find out their assets on the management, and then use an estimated elasticity to show how much their demand would have added to the stock prices.

And so those are analysis that you don't see in the BlackRock or Mackenzie type [inaudible 00:18:32] on sustainability. I also had to address another concern. What if ESG employee satisfaction doesn't matter profound performance, but the market incorrectly discounts it because they think it's just wasting money, and therefore the highest stock which [inaudible 00:18:48] was unwinding of a discount. So that's the case in which I think it worked even I had to be purgatory when writing the paper, it was good to make sure that I have considered the [inaudible 00:18:58] but the process is not perfect.

Oh, I guess the face would be academics are people too. So what I mean by this is, yes, we are [inaudible 00:19:10] with your science but there are biases and there might be incentives, I have to do something else. So for an academic right now, if you write pro ESG papers, then they will be widely confident in the media, you could get lucrative consulting, engagements, and keynote speeches. And so, there might be much more incentive to find positive results than when I was working on this about 15 years ago before ESG was so popular.

Number two, as a journal editor, you want to write papers, you want to publish papers that will be impactful, they will cited, they will be adding to the journal's impact factor. And what I've seen unfortunately is a lot of top journals take some flimsy ESG papers even though the editors of the journal, so maybe the pair of viewers might not know much about ESG is. And you feel they might not know much about the academic research on ESG, certainly not the practitioner views on ESG. Some papers might be published which make assumptions which are completely contradictory to the real world. But once the paper gets there, then if it makes a bit assumption, then others will follow it. So this doesn't mean that if something is published in a peer review journal it is gospel, instead it is an indicator which is why I put some faith in it but we should put blind face in it. And in particularly one of the things I tried to highlight in the book is to look at scientific consensus rather than being swayed by one particular paper because there could be mistakes in that paper.

Jason Mitchell:

This is super interesting. I'm thinking about the work of Cam Harvey Duke University and some of the studies he's done. Cam was obviously a former editor of the Journal of Finance and former president of the American Finance Association. So I think he carries a little bit of weight, but he's talked about this replication crisis in the academic world, the fact that the findings of so many seminal academic studies can't be repeated. He points to this, the phenomenon of P-hacking the idea that researchers consciously or even unconsciously twist the data to draw a compelling but potentially false relationship between variables. In fact, Cam is quoted as saying that in financial academia, again, his quote, "Most claimed research findings are likely false." How do you think about the incentives in academics, particularly in the ESG space, driving this P-hacking phenomenon, and what parallels would you draw out in the sustainable investing practitioner world around this as well?

Alex Edmans:

I'd say Cam Harvey has a lot of [inaudible 00:21:42] not just a little, so I respect him greatly. And I think if he raises concern, I think it should be taken very seriously. So both for him as a leading producer of research but also as a gatekeeper as the editor of the most prestigious journal in the profession. And I say, yes, there are significant concerns and I'll just repeat my phrase academics are people too, so just like some practitioners might be producing research which gives the result that people want, that's the same for academics.

And perhaps one must say that the problem is even worst now than in the past. So in the past maybe academics did not have as much impact in the real world, but nowadays if you can go viral with a TED Talk or with birks, or you can make lucrative consisting assignments. Some academics have set up ESG consultancies and being bought out, therefore if you give a result that people want to hear then there's a lot of fail for that financially and in terms of better reputation.

And so, well, what does that mean if you own academic with lots of time or computing power or PhD students or can't go with it, you can mind the data in multiple ways and try to find results that [inaudible 00:22:59] people like and therefore this will get you famous, and this is a concern which I think is perhaps even greater now that it has been in the past.

Jason Mitchell:

You've long been an advocate for the importance of sustainable investing, and frankly, I've got a lot of respect for that. For you in particular, supporting it in a, I'd say much more thoughtful and nuanced way than some of the simplistic cheerleading we've seen. At the same time, you've been quite punchy, even snarky in your criticisms of people, particularly on the DEI diversity front. I'm thinking here about your Nikolai Tangent post where you push back on his message extolling the benefits of diversity relative to his all-male best team in the investment world, or the broadside you fired at BlackRock on their DEI paper. So I guess on the one hand, your criticism seems clear and justified. On the other hand, I can't help but wonder if there's a risk that you think about that this creates ammunition for the anti-ESG crowd. And look, I want to be clear in saying that I'm not defending poor research, but where is the divide if one exists between highlighting biases and well-meaning research efforts and amplifying the rejection of ESG or DEI regardless of its merit?

Alex Edmans:

I think it's a great question. I really appreciate you're asking me this. I actually don't think that there's any inconsistency or any device. I think the role of an academic is very clear, to say what the research finds in respective of whether you wanted to be true. So just an analogy. So let's say, you're a colleague of Lucy Letby, and you believe that what she did was absolutely horrific murdering both babies. And you are asked to testify in a criminal trial and you're asked by the cross examiner, you were at the police claim that you said that Lucy Letby confessed to you that she killed those babies.

Now, in respect of how much you think she's guilty and how much you find her [inaudible 00:25:02], if Lucy Letby did not confessed to you, you should say no. I think there's only one thing that you can say there, your goal as a witness is to tell the truth. That's what you swear to do when you take a stand. Now, is it true that perhaps that could then give ammunition to her defence attorney to say, "Well, if the police lied about that, they could be lying about other things." Yes, it is technically possible but there should be enough other evidence to convict her. Similarly, there is lots of evidence and there's lots of a good conceptualism for why ESG is beneficial to company's performance that may reject highlighting some issues with these papers is not a rejection at all of DEI.

And I think you're quite fair, Jason, to say that I have been punchy in my courtesisms. I might slightly disagree with what's knocking that when I tried to make this criticisms, I tried to stress how my concerns are only with the study and not the DEI movement in general. So when I've written post on my website, I highlighter, "This is only highlighting the issues with one particular study." Absence of evidence is not evidence of absence. It could be the other studies which measure DEI is a broader way than just gender and ethnicity might find a link to financial performance or maybe the goal of this is not financial performance at all. Maybe we want to do this because we think it's the right thing to do, it socially desirable. And so I think by having those caveats, try to make sure that what I'm saying is not misused as ammunition for the anti-ESG crowd, but instead, just fully focuses on what I'm supposed to bear witness to just like a witness in criminal trial.

Jason Mitchell:

Yeah, it's a really interesting topic and one that I keep running into specifically with climate scientists and ecologists. And in fact, in an upcoming podcast that I recently recorded with, his name is Adam Sobel. He's an atmospheric scientist at Columbia University. He writes that we, and obviously he's talking about climate scientists, have to learn to be good scientists and good citizens at the same time. And to see those obligations is connected rather than at odds. It seems like trying to be a good citizen is where potentially, I guess, you'd say the biases really began to manifest. So how do you think about the risks of sharing political opinions while simultaneously maintaining credibility as an impartial academic researcher? In other words, how can academics, particularly in the highly, highly, highly politicised, sustainable and climate investing space, serve as trustworthy brokers of knowledge?

Alex Edmans:

So I think we should not share political opinions, but we should certainly share scientific opinions. And if those scientific opinions can be used by people on one of another side of political spectrum, that's something that other people used, that is not something we should necessarily take into account. Our role is to tell the truth. Again, a good analogy is to a witness at the trial, you tell the truth, now it is true that the council of one side or the other could use that for particular purposes but that is not your role. Your role there is to tell, say what the truth is, and therefore to me, I don't see a contradiction between a good scientist and a good citizen. I believe that us, as a scientist, the way in which were good citizens is by giving a good scientist, thoughtfully agree with Adam on that.

Jason Mitchell:

I can't help but ask on the diversity and DEI topic, why choose Strive Investment Management as an audience for the DEI critique that you had when their internal biases, frankly, it's on their webpage appear obvious? Isn't the title of the discussion Why DEI Data may Contain Lies? It almost feels like one of the cautions you warn against in the book. Can you pull back the curtains and give some context for why you chose that audience and form to discuss this?

Alex Edmans:

Again, I appreciate you asking the question. So it's true that Strive does have biases. But every asset manager has biases. So today I just came back from Stockholm where I gave a court talk on the power of sustainable investing to a sustainable investor. So they have a bias, they believe the way to maximise financial return is to invest sustainably. And I gave a talk which was consistent with their investment strategy. For Strive, their view is the way to maximise financial return is not to consider ESG factors and least on what they are speak about, I was highlighting how demographic diversity metrics don't improve financial performance.

So I think every asset manager, every audience will have some particular bias. Strive is as much entitled to a particular view point as anybody else no matter how much you agree or disagree with the politics of the founder, that's not my concern, as again, I don't think we should a political as academic researchers might always just to speak about the research. Now, [inaudible 00:30:16] I chose Strive as the audience, Strive chose me, Strive invited me, they saw my research and they asked me to present it, and they also said that in invitation, "We disagree with you." And that you claim that there's still a social case for diversity even if there was not a financial case.

And so that was something that I brought up in my webinar. As I said, the weakness of these papers is certainly not nail in the [inaudible 00:30:45] coffin in the DEI movement. If you control that, there have been other organisations which haven't chosen me as an audience because they didn't fully agree with the views that I present. So let me just read examples. One of them was a content on universal ownership where I was uninvited. Why? Because a lot of my work highlights that what is good for wider society is good for company's value in the long turn. But the universal ownership crowd wanted to argue that what's good for society might be banned for companies, and therefore, only universal owners who own are the companies in the portfolio who would benefit from the [inaudible 00:31:29] production would undertake the engagement.

So they wanted to say that universal owners were particularly special and will do things that no other investors did. But given that I have written that ESG, it's nothing special that mainstream investors should take ESG seriously and uninvited me. There was podcast which wanted me to talk about sustainability and they asked for my views on B corps. And I said B corps are indeed a good way to become more sustainable, but they're not the only way. There's other ways you can do that. And because what they wanted was unequivocal advocacy of B corp, then again, uninvited.

And the third wasn't so much uninviting but criticism after the fact. There was an American finance association session, DFA is the premier conference in my profession on stakeholders and shareholders, and I was asked to present my work on the value of stakeholder capital for long term financial term, so I accepted the invite. I didn't know who the other invitees would be. And then in the end, one other invitee happened to be Steve Koonin who's [inaudible 00:32:35] scepticism on climate change. And one person publicly tried to shame me on LinkedIn by saying where was my integrity in associating with this climate denial. Well, I was not associating with him at all for different people who invited to give their views which was separate.

I did not endorse in any way his claims. And in fact, the fact that he was being there, that should not deny the audience, the ability to hear from my research on the benefits of ESG. So I don't see why they should be guilt by association or one should be cancelled for speaking in a somewhat potentially hostile audience. In fact, where do we need to speak out about ideas, it's in the ideas where we're not [inaudible 00:33:23] to convert it, otherwise, we're just speaking American chamber and we are using our effectiveness.

Jason Mitchell:

So I am really glad you're bringing up this because frankly, it's an issue that really troubles me. In fact, I was going to ask you about what you've seen, what pushback you've received, and I guess, what that says about the general mood and thinking in the ESG space. I'm interested in this because I myself have been surprised at the reception of podcast episodes I've done, specifically, I'm thinking of Tom Gosling's work on fiduciary duty and Kelly Xu's paper on counterproductive sustainable investing. Tom's talked about getting culled in by asset managers for reeducation. And for Kelly, there was a real suspicion about her motivations for writing a paper called Counterproductive Sustainable Investing. All of this is to say that I get the distinct feeling, at least from parts of the sustainable investing community, that if you're not unequivocally supporting the movement, then you must be trying to undermine it from the inside, which is unfortunate, and obviously it windows down the space for constructive and productive discourse.

Alex Edmans:

And I think this is a bit concerning, and I haven't heard of the pushback, the reception that you got for your podcast. I really applaud you for giving air time to this really important research by Tom and Kelly. And where do I think that this pushback might come from? I think people can flight the destination with the journey or the goal with the approach. So they might think, well, Tom and Kelly, they might be just rampant catalyst who don't care about making the world a better place. No, they absolutely share the same goal that everybody else shares, but they're suggesting a different approach.

So Kelly's suggesting well it's not as simple as a stamping or brown stock even though that make you feel better. And Tom, again, highlight there might be potential limitations to what the investment industry can achieve, so we indeed need to look at other things such as government regulation. So they absolutely share our goal, and they are trying to highlight that we want to pursue it in more nuance way. And so why might people react to that negatively? Number, it might be. They confused the goal with the approach. They might think your climate and I, when you're absolutely not. They might want the simple solution, because if all you've acquired is to dump brown stocks, well, that's something which is really is. But if you need to engage with companies, and engagement needs to be more than just asking them to disclose something that is a bit more difficult.

Why think this is such a concern is one value that ESG advocated tend to highlight is diversity, but diversity doesn't mean just demographic diversity, it means, diversity of thinking. So you want to applaud these different view points rather than attributing the fairest motives to them. And when you ask the stats, Jason, about the reaction I've got, yeah, that's actually mean very positive so part of this will be a selection bias because the people who write to me or invite me to speak at conferences will be the ones who want some more nuance viewpoints. The three examples that I gave are very isolated examples, and indeed, a person who wrote this negative post on LinkedIn about me speaking at American Finance Association, I think she only got one comment and one like, so this was not something which was universal supported but it was strange and disappointing that she thought that she could get a lot of likes on social media, but trying to out me for having spoken at this event where unbeknown to be if there was somebody with a different view on climate also speaking.

Jason Mitchell:

I guess I want to move on a little bit, although it's somewhat related. There's this interesting array of people who have, I'm thinking of Tariq Fancy, Desiree Fixler, Stuart Kirk to name a few who have very visibly critiqued the space, sometimes helpfully, sometimes not. Your mention of Tariq Fancy in the book at least isn't necessarily flattering. You write that he "exploited" Black and white thinking alleging that the entire sustainability industry was a ruse, even though he only had experience at one company. When in your mind, does a critical but constructive force in the sustainability space look like?

Alex Edmans:

I think it's absolutely good to have criticism but I think number one, your incentives should be correct. And number two, the evidence basis for this should also be correct. And so what I mean by the later, if you want to critic, this is sustainability investing industry, you might use large [inaudible 00:38:08], that ESG on correlating with financial informants or that ESG engagements does not have a impact on companies. But the consent I see raised by Tariq, I just based on anecdotes, there was no evidence at all even his initial US [inaudible 00:38:25] nor his 40-page essay on media.

And indeed, he graciously agreed to debate with me. In The Wall Street Journal, he wrote there was emerging evidence that ESG has no impact. I also see the evidence so that I could ease up, agree to it so I can see the point and respond to it, but he still refuse to cite any. So I think when there are critics which are just based on one person's personal view or personal experience have one firm, if you're using that unover extrapolating that to make general claims about the sustainable investment industry then this is something which is not fully supported.

And number two, I think, the incentives might also be a concern so Tariq became extremely famous based on this, and he was invited to give lots of high-price keynotes speeches and bestowed leading opens and leading newspapers like the FT and The Economist. So you do have incentives to say something which is very sweeping and not very nuance. And so when I have raised concerns about sustainable investing research, they have not been of clear benefit to me.

So Nicolai Tangen of NBIM, I know very well that he has a smart thinking podcast. And I knew at that time I made a critic that I would be writing a book, and maybe that would be a great outlet for the podcast to now my chance of getting on that podcast is zero. Similarly, with BlackRock, I know they have a sustainable investing institute and maybe they would want to work with academics on this institute. But the reason why I raised the concerns even though I don't personally benefit from doing so is these was statements was made about scientific research. I'm somebody who, as an academic, understands what is good or bad research.

And to be honest and I wish this was not the case. I have a little bit of latitude to raise these concerns, why on something as charged as DEI, if I was a white male and I was to raise those concerns, I might be cancelled for being anti-DEI based ideological reason, but because I'm an ethnic minority, those concerns might be [inaudible 00:40:35] which is crazy because what should matter is the strength of my arguments not the colour of my skin, but that might be a way in which I'm able to raise those concerns. And similarly with the ESG, given that a lot of my work is on the benefits of ESG, I can also raise some concerns about it and not be accused of being ideologically against ESG.

Jason Mitchell:

Your book is based very much on a rationalist scientific view. But we know that data and facts often have very little role in how people actually develop their views. As you write about, people often interpret the facts to their views rather than the other way around. Smart people are generally just better at this. They use their smartness or wits to explain to themselves why they're right rather than to generally improve the quality of their views, for instance. So what have you learned based on the reaction to your book and the engagements you have under the may contain lies theme? What does and doesn't work in terms of bringing people, I guess, to an appreciation of the facts in especially emotive areas like ESG that have become a matter of identity?

Alex Edmans:

I think it's a couple of things. The first one is if you want to be critical to try to be as constructive and respectful as possible. And so often, you can see on social media, people trying to embarrass people and shame them and catch them out. But here when I try to [inaudible 00:41:58] issues, these are only based on the data, it's not because I want to school won against the ESG camp. I will call myself part of the ESG camp, and so it's not for ideological reasons that I want to dismiss this.

And related to that, I think it's important to disentangle the goal with the approach. So even there are somebody who's freely supportive of DEI, I might target the best way of achieving this outcome, is not just to focus on demographic diversity. Why? Because the totality of a person is far more than just their gender and ethnicity, there's many of the things that we will want to evaluate. And so, when we highlight this that I'm actually sharing the same goal as everybody else but trying to pursue it in a more nuance way, then that might help reduce some of the emotional pushback that I might otherwise get.

Jason Mitchell:

To what degree does Kim Schumacher's point about competency greenwashing? I did an episode where I called it sustainable investing's Dunning-Kruger problem. To what degree does it play a role in your thinking around all this? In your 2020 Gresham college lecture and your critique on the Harvard Business Review diversity paper, you write about gauging authorial credibility and warning against the halo effect, which you've mentioned earlier and theories of everything. Practitioners, I guess, generally aren't academics with deep subject matter expertise. Isn't it naive to think that they can write the rigorous papers that can compete with academics? I mean, that's not the point. The peer review process doesn't really exist in the same way for practitioners that it does for academics.

Alex Edmans:

I think that it is different for practitioners to write academic papers, academic quality papers of showing causation rather than correlation. Why? Just because very difficult statistical techniques need to be employed. There's a reason for why now it takes six or even seven years to get a PhD. And even after [inaudible 00:43:58] maybe it takes several years before you hit your stride and do your best work. But something where if you're busy consultant or fun manager with a day job, it's difficult to get that level of expertise.

Those not mean that practitioners should never be allowed to publish reports, absolutely not. And I thought you represent Kim as great, Kim said he does not want at all to be the gatekeeper of who's allowed to say something on ESG, and I should not be the gatekeeper either and do these lots of reports which I think are very informative indeed if the reports are giving real world statistics, that'll be really helpful. I often used the Mackenzie report to find out, well, what percentage of cobalt is from a particular country, a particular industry, how much raw materials does it use. It might even try to project different things over time, and that's something which e-commerce are not to do which is prediction and forecasting in the future. But when it comes to cause-effect relationship between two variables, such diversity and [inaudible 00:45:00] financial performance, that's something where statistical knowledge and expertise is really important.

Jason Mitchell:

It is true, and I guess the objectives are slightly different, right? I mean, academic research tends to focus on very discrete research findings, phenomenon within a certain asset class, region, or sector, controlling for as many variables as possible. Whereas practitioners tend to search for generalist approaches and applications across markets, regions, sectors, and themes.

Alex Edmans:

I think that's very fair. And one criticism of academic research is thanks to [inaudible 00:45:33] is there's a trade of between saying nothing precisely and precisely nothing. So some people are concerned. The academics are so concerned about precision that they find a one very narrow area in which you can nail something with close to 100% certainty, but that has so little external validity that it's almost useless. And so this is why in the Birk, I tried to distinguish evidence and proof we focus sometimes too much on evidence it being highly internally valid in one particular setting that it is not so generalizable.

So I think there was a role for general papers which have general correlations and maybe practitioners just because they have access to more data than academics can be really useful in that regard as long as you only highlight that it's a correlation and not causation. So one of my recent paper entitled Diversity, Equity, and Inclusion use a partition of data source from the great place to work in dispute to have a more holistic measure of diversity, equity, inclusions which goes beyond demographic diversity. And my [inaudible 00:46:42] are really upfront in that paper that we only show correlation. We don't share causation. We would like to provide results that holistic measure of DEI causey improves financial performance, but what we have here is correlation. It could be correlated with many other things even though we can try to control for as much as possible, there's always some things that we won't be able to control for.

Jason Mitchell:

Last question, and I can't help but challenge you on this. I understand the logic and the motivation you make in your paper, the end of ESG, that ESG is no worse or better than any other intangible factor that creates long-term financial and social returns that we should transition to the notion of your term rational sustainability, which is less about box ticking and more about informed value creation. So I guess two questions. Isn't the end of ESG a black and white provocative headline? And two, if you're such a fervent believer in that, why continue to teach an LBS course called ESG Investing? Or is the course more about trying to enlighten and retire the term?

Alex Edmans:

Great question. And you should absolutely challenge me because my book highlight the importance of being wiling to be challenged, and it's through this debate that people get back up.

So your first question is is the title the end of ESG somewhat black and white? And it is this on the face of it. And I have to admit that it might not have got as many reads, had it different title, but that was not why I chose the title, it wasn't so much for clickbait. But I was trying to highlight the end of ESG as niche field, it should seen as mainstream. And here I standing on the shoulders of giants so that [inaudible 00:48:27] the Nobel Prize winner had written an article called the end of behavioural finance, that might seem crazy as one of the founders of [inaudible 00:48:34] Finance, but he said they should be seen as a niche field, anybody who wants to understand what dry is the stock market needs to look at not only fundamental factors, but also other factor.

Your second question, well, have I been hypocritical because I'm launching this online elective course at ESG Investing. And I absolutely share your concerns and I ask the marketing department not to call it ESG Investing for all of the reasons, because I said I might get questions likes your question. Why is this guy who's reason of why they call the end of ESG which is stop using this term. Why is he using this term in his course, and they said no, we just need to do this for search engine optimization. They tried different permutations such as sustainable investing or response on investing, but ESG Investing was the best for that. And so if the girl is to get ESG investing scene as mainstream, then the argument was, "Well, we want people who will want to take the course because this is he phase that rightly along the practitioners ride will now use, and maybe at the end of the course, then they will come out with the message that ESG Investing is not just for the investors, it is mainstream.

Jason Mitchell:

So it's been fascinating to discuss why misinformation is a problem that affects us all, how we can counter it through more critical analysis and what it means for the world of sustainable investing. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, head of responsible investment research at Man Group here today with Alex Edmans, professor of finance at London Business School. Many thanks for joining us on a sustainable future, and I hope you'll join us on our next podcast episode. Alex, thank you so much for this.

Alex Edmans:

Thanks so much, Jason. Thanks for these fantastic challenging questions.

Jason Mitchell:

I'm Jason Mitchell. Thanks for joining us. Special thanks to our guests, of course, everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.