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ESG: will profits become an endangered species?


Corporate profitability — the heart of capitalism — has had a good run. USA Inc and UK plc have swelled their bounty most years, give or take the odd downturn. But stakeholder capitalism, or investing to meet environmental, social and governance (ESG) standards, implies structural change.

Saving the planet endangers profits for Big Oil. Royal Dutch Shell says oil production peaked in 2019. Shell, BP and America’s Exxon have written off tens of billions of dollars on stranded, uneconomic assets. Future profits require investments in new technology to bear fruit.

Saudi Aramco, one of the world’s most profitable companies, continues to stake its future — and $39bn of forecasted annual capital expenditure — on oil. But its ebitda margins are steadily contracting, from 70 per cent in 2016 to 58 per cent in pre-pandemic 2019.

Meanwhile, governments keen to protect citizens and beef up national revenue are targeting the tech industry. Several countries, including the UK, have imposed digital levies that will stay in place until a global tax agreement comes into force. Tech companies are no longer given free rein to disrupt society in search of new revenue streams. See Meta’s partial retreat from facial recognition.

Workers have seen their share of the spoils dwindle for decades. A shifting labour market puts more power in their hands. Problems in the gig economy have prompted legal challenges. Uber claimed prices could double if it was subject to a California bill seeking to reclassify some gig workers as employees. A UK Supreme Court ruling that granted drivers holiday pay and a minimum wage prompted the company to set aside $600m for historic claims.

But to see real change, look at Communist China. Why go through the middle layer of taxation to redistribute wealth when you can just commandeer a slice of the profit haul? This year, tech groups, including Alibaba and Pinduoduo, have responded to a regulatory clampdown by “donating” profits to charity and promoting the government’s “common prosperity” drive. Compared to China’s crackdowns, any changes due to ESG seem mild.

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