The Gimmick

The Gimmick

It’s not just for magic: It’s all around us.

Environmental, social and governance (ESG) reporting and investing is being touted as the way to shift business behavior away from simply maximizing shareholder value (i.e., profit only) and toward sustainable, or triple bottom line – people, planet, profit – value. The idea behind ESG reporting is to create transparency and reveal the ways in which the business’s operations are impacting the environment and society, and to ensure the business is run according to acceptable norms of governance.

The standards used for assessing ESG performance remain largely in flux; however, that’s changing. The Securities and Exchange Commission (SEC) recently announced its intent to promulgate rules that will govern ESG reporting for publicly traded corporations. This is certainly good news and may lead to the movement toward sustainable business that we so desperately need. But there’s another side to the story, one that I will attempt to demonstrate is rooted in the system of capitalist economics.

To begin, we’ll turn to Karl Marx’s critique of capitalism. Before doing so, however, it’s important to point-out that I, not unlike most Americans my age, was raised to believe anything having to do with Karl Marx was on par with atrocities committed by the likes of Joseph Stalin, Pol Pot and a host of other dictators. There’s a big difference between being a brilliant thinker and philosopher, and a psychopathic dictator. Marx contributed to our understanding of capitalism; he didn’t put millions to their deaths. My intent in referring to Marx’s work is because it’s a brilliant and cogently critical analysis of the system that today is destroying the planet.

A fundamental tenet of Marxian economic thought has to do with what’s called the labor theory of value. It’s actually simple to understand. Work, the things we do to provide for our food, shelter and clothing, is called labor, and in Marxian thought, labor is the only source of value.

In the capitalist system, when an employer pays an employee for their labor, the compensation is actually shorted by what Marx called “surplus value”, or profit. In other words, if I work for eight hours, or a standard work day, the amount of money my employer pays for my labor is less than it’s actually worth. Now, to be sure, the arrangement seems to work, because I leave my place of employment content with my income. The problem is that I actually have no idea how much value is being pinched by my employer as surplus. Marx understood this as exploitation; it’s a form of trickery, or deceit. Another way of looking at it is as a gimmick.

The word gimmick is thought to be an anagram of the word “magic”, or “gimac”. The gimmick acts as a distraction and leads the observer to believe one thing is happening, when in fact something else is taking place. In the Marxian sense, the worker is tricked by a gimmick. Unlike the innocuous use of gimmicks for magic, in this case the gimmick is wrapped in the notion of value. For the worker the time spent in labor has a value fixed by the worker’s perspective. After all, the only thing we have is time. On the other hand, the employer, driven to generate surplus value, does not see value from the worker’s perspective. In this sense, both are deceived by the gimmick, and both are victims of its treachery.

The scholar, Sianne Ngai, has studied and written about the pervasiveness of gimmickry in our culture. Ngai sees a sort of “yin and yang” to gimmickry. In other words, gimmicks can be attractive and at the same time repulsive. Gimmicks have this capacity to attract, and depending on how we perceive the extent to which value is taken up by the gimmick, we can be repulsed.

For example, I may walk down the aisle of my grocery store and be attracted to a box of laundry detergent that has the words, “New and Improved” written on it, along with bold graphics and colors. The detergent also carries a higher price than the earlier version. If I’m taken in, I’ll purchase the detergent. Upon using it, I could find that it works no better than the earlier, not so improved version, or I could find that it works much better. What happens when I use the product is not as important as my perception of value, and this is something that only I can ascertain. We could take into account market dynamics, competition and so forth, all of which seem to justify the higher price, but in the end, the judgment of value is left to me.  The point is that the gimmick – the new box, fancy lettering and all the rest – and the value wrapped in it lacks transparency.

Turning now to the matter of ESG reporting, and the extent to which it offers a mechanism for becoming sustainable, let’s look at how the gimmick may be at play.

Large corporations that have significant environmental impacts, such as chemical manufacturers, will likely operate more than one facility, or plant. For example, Dow Chemical operates thirty-seven plants in North America. When these plants are owned by a corporation, as real assets, their respective environmental impacts roll-up under the corporate entity. In other words, an accounting of the corporation’s negative environmental impacts includes all of its real assets and is registered under the corporation’s ESG assessment.

A recent study, using extensive data analytics, investigated the extent to which divestment (i.e., selling real assets) works to improve a corporation’s ESG assessment. The research indicates that in a statistically significant number of cases, corporations have improved their ESG assessments by simply selling plants that pull done their environmental assessment. The study also indicates that the sale of these offending plants doesn’t necessarily mean their operations will be improved, or that they’ll be shut down. Rather, the offending plant often becomes an external supplier to the corporation that sold it. In other words, nothing has changed except the ownership of the offending plant. The corporate entity produces the same products and operates in the same fashion, but since it no longer owns the offending plant, its ESG assessment goes up.

The foregoing bears the marks of gimmickry, and it’s something that needs to be understood. Granted, we are in the nascent stages of leveraging the power of ESG minded investments to bring change to the marketplace. But, by the same token, that corporations are legally capable of using gimmickry to essentially game their ESG scores must be addressed. This is the role of the regulatory environment and government writ large. The question becomes one of whether we’re capable of getting our government, at a national scale, to address these sorts of problems before we run out of time. If what’s gone-on in Washington is any indication, we are in for some serious trouble.

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