‘Sustainability’ Is the Most Misleading of the New Business Buzzwords

By R. David McLean，Cato Institute，May 14, 2024

Earlier this year Hertz announced it was selling 20,000 of the electric vehicles in its fleet and would buy gas-powered vehicles instead.

The reason? Electric vehicles are too expensive to maintain, and more customers prefer gas-powered cars.

Hertz is taking a $245 million loss on the sale. The company’s CEO, who increased electric vehicles’ share of its fleet, resigned.

After all that, is Hertz a more, or less, sustainable company?

One study estimates that a single electric vehicle receives over $48,000 in subsidies over a 10-year lifetime. The tax credits and rebates that most people are familiar with add up to nearly $9,000. Is it fair to describe a product as sustainable if it needs to be subsidized this much?

Oil companies are supposedly unsustainable. Yet 11 of the world’s top 25 most profitable companies, such as Exxon, Shell, and Chevron, are fossil fuel companies. None of them need subsidies to survive.

In contrast, Siemens Energy, one of the world’s largest wind turbine manufacturers, lost $4.5 billion in 2023. The German government recently gave it a rescue package worth $16 billion in U.S. dollars. Which is a more sustainable business, Siemens or the fossil fuel companies?

Calling something sustainable does not make it so. Firms that cannot make consistent profits will either have to be subsidized or die. It does not matter if they make solar panels or pump oil.

Investing in companies that make windmills, solar panels, and electric vehicles in the absence of profits is a bet that governments will continue subsidizing them. Calling that “sustainable investing” misrepresents reality.

Continuing to subsidize such businesses will be very expensive. The $16 billion Siemens got from the German government is small potatoes.

The European Round Table for Industry recently stated that it will cost Europeans $853 billion USD by 2030 and $2.66 trillion by 2050 to meet the goal of net zero C02 emissions by 2050. That money could instead be invested in schools, hospitals, roads, new technologies, cures for diseases, and many other things that can benefit humanity today and in the foreseeable future. Yet, the sustainability moniker doesn’t delve into those issues.

That’s because the sustainability moniker’s use in the business world has nothing to do with the actual meaning of the word. Rather, it originated among progressives working at the United Nations, the World Economic Forum, and in the finance industry to promote progressive agendas that most people do not favor.

The Oxford Languages dictionary defines sustainable as “able to be maintained at a certain rate or level.” Some fund managers such as BlackRock define sustainable investing as investing in so-called ESG funds—those promoting “environmental, social, and governance” goals.

But ESG is not in the definition of sustainable. Rather, it is a subjective rating scheme promoting environmental and social causes that progressives favor. We can debate the merits of those causes, but an honest debate requires not placing misleading labels on them.

David McLean is the William G. Droms Professor of Finance and Finance Area Chair at Georgetown University’s McDonough School of Business. His research interests are in stock return predictability, behavioral finance, and the interplay between financial markets and corporate investment. David’s papers have been published in leading finance journals, such as the Journal of Finance, Journal of Financial Economics, and Review of Financial Studies. His research has won several awards, including the Amundi Smith Breeden Award for the best paper in the Journal of Finance and the Jensen Prize for the best paper in the Journal of Financial Economics. Major media outlets, including the Wall Street Journal, Financial Times, New York Times, and the Economist have covered his research. David serves on the editorial boards of several academic journals, including Management Science and the Journal of Financial and Quantitative Analysis. He is the author of the book The Case for Shareholder Capitalism: How the Pursuit of Profit Benefits All.

Reprinted from Cato Institute

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