One silver lining to FTX’s demise is that it highlights the fissures in environmental, social, and governance ratings. Virtue signaling harms shareholder value, and in the case of FTX, acts as a façade for duplicitous business activity.
ESG ratings agencies such as S&P Global, MSCI, Sustainalytics, and Truvalue Labs calculate scores for individual companies and compile ESG indices based on a variety of factors such as the degree of diversity among board directors, exposure to greenhouse gas emissions, firearms, and human rights violations. According to an ESG score from Truvalue Labs, FTX scored higher on “leadership and governance” than ExxonMobil. However, FTX’s new CEO overseeing the bankruptcy stated, when talking about FTX, that he had never “seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”
Although still under investigation, FTX has been accused of several corporate governance failures. The company lacked a coherent board of directors. It also allegedly transferred customer funds to crypto hedge fund Alameda Research to conduct speculative transactions, failed to establish proper cash management procedures, and possessed unaudited financials.
When Sam Bankman-Fried (SBF) led FTX, the company prided itself on its social and environmental activism. The FTX Foundation, FTX’s charity arm, stated its dedication to climate change, animal welfare, and future pandemic prevention. The Foundation established projects such as the Future Fund, which was funded mainly by FTX’s top leaders, to “make grants to nonprofits and individuals, and investments in socially-impactful companies.”
While noble causes at face value, the board of directors’ fiduciary duty is to its shareholders and ensuring the maximization of financial returns. Too much focus on ancillary ESG factors distracts from a company’s fiduciary duty.
FTX’s adoption of “effective altruism” has been compared to “greenwashing,” or deceiving investors and consumers about the non-pecuniary effects of certain investment products. Even SBF recently admitted in an interview with Vox that “ESG has been perverted beyond recognition” after ranting that regulators do nothing to help customers—they only stifle business.
Although the million-dollar-question question is how the FTX bankruptcy will affect the broader cryptocurrency market and regulatory environment moving forward, one thing is certain—it has surely damaged virtue signaling and called into question the validity of ESG.
FTX’s collapse further exposes ESG’s cracks. Effective altruism and socially responsible investing are failing to adhere to conventional requirements of abiding by fiduciary duty and keeping the financial returns of shareholders at the forefront of the minds of board directors.
Congress should continue Sen. Pat Toomey’s (R-Pa.) work to uncover how ESG ratings agencies are calculating ESG scores and further pushing board directors away from their fiduciary duty.