As an epitaph for ESG it doesn’t get much pithier than the last words doled out by US valuation expert, Aswath Damodaran, to a NZ CFA Society conference late in May.
“Born in sanctimony, nurtured with hypocrisy and sold with sophistry,” Damodaran told the CFA crowd via video. “If you ever bury ESG, I hope those words go on that tombstone.”
The noted New York University finance professor slammed ESG as a “substance-less concept” that was marketed first as a proxy for “goodness” before being rebranded as a source of alpha, then a risk metric and “now as a measure of disclosure”.
“People who claim to measure ESG have no idea of what they are measuring,” Damodaran said. “Because of that it is the emptiest concept.”
But the scathing assessment of ESG came after a wide-ranging talk on fundamental company valuation techniques that also touched on another abbreviated hyper-trend, AI – or artificial intelligence.
“When all is said and done, AI is going to make companies less profitable, not more profitable,” he said.
Bar the minority of firms selling AI products, Damodaran said the new buzz-word would simply morph into higher costs for companies overall with no competitive advantage in a world where the technology is ubiquitous.
“If everybody has AI, then nobody will have AI,” he said.
Such skepticism is in short supply, however, in a market going gaga over anything AI-related, which reinforced his broader theme of the losing art of valuation.
Damodaran said the reliance on ever-increasing petabytes of data and analytical tools has swamped a more nuanced, sense-based approach to valuing companies.
“We have a lot more data than we did 40 years ago, we have far more powerful tools but in my view the quality of valuations now is worse than 40 years ago,” he said.
“…We see that in every aspect of life, numbers replacing the capacity to read what’s happening… it gives us a false sense of precision, a false sense of security… AI is going to make that worse.”
While data remain important, Damodaran said valuation also requires analysts to judge the probabilities of corporate narratives playing out over time.
“Good valuations are bridges between stories and numbers,” he told the CFA crowd.
For example, showcasing his blend of literary criticism and spreadsheet finesse, Damodaran knocked out a valuation for NZX favourite, Fisher & Paykel Healthcare, at just under $8 compared to current on-market price of $27.
“It is possible that I have been shoddy and made a fundamental error or missed a key element of the company’s story,” he said. “… So, what am I missing?”
Essentially, people tend to be narrative- or number-oriented, Damodaran said, with the latter group tending to be the most dogmatic in his university valuation courses.
“I always have more trouble with number-crunchers,” he said. “You give me a hundred history majors and I can teach them everything they need to know… to value a company in 24 hours. You give me a hundred engineers, I’m completely screwed because they’ve spent their whole lifetime bludgeoning their imagination into the ground.”
Damodaran himself is a reformed numbers-man after an early encounter with university-grade Moby Dick analysis turned him off stories.
Deep into an in-class discussion, he asked “when are we going to talk about the whale?”.
“I remember the instructor saying there is no whale… she said it’s a metaphor… Coming out of the class I came to the singular conclusion that never again am I going to subject myself to that kind of bullshit,” Damodaran said.
To recap Moby Dick, everyone dies except the whale and the narrator, Ishmael, who ends the tale:
“And I only am escaped alone to tell thee.”