29 July, 2022
Three letters that were sold as the solution that would allow capitalism to thrive whilst saving the planet. ESG: environment, social and governance. In the investment sector, ESG is a lens used to encourage investors to think not just about financial returns, but also non-financial ones, the theory being that these considerations will create value for the world and – in the long run – for the investor.
Critics of ESG draw attention to the inconsistency of ratings. Corporate scores from different agencies align less than half the time. Meanwhile, a company can have all the suggested procedures and processes in place to review and monitor climatic impact and still proceed to invest in or benefit from the emission of carbon – take the recent exclusion of Tesla from the S&P ESG 500 index, while Exxon Mobil is included.
A recent article from The Economist proposes that we should strip back our efforts, and focus solely on emissions. Not social, not governance, not anything else environmental. Just carbon. And there’s some merit to this simplistic approach – after all, this is where the greatest threat to the planet exists.
The article acknowledges the importance of a corporate focus on social and governance themes, and doesn’t suggest these areas are ignored completely, but argues a “one size fits all” solution for these isn’t appropriate, and that they should be addressed and assessed solely at a company level.
While we agree with many of the issues raised, there’s a real danger with this narrow approach, even just from an E perspective, let alone the S and the G.
If other environmental issues such as biodiversity, waste and water are taken out of the picture, there’s a risk they fall off the agenda completely. They may not grab the headlines but they are material and relevant, and also highly interconnected to carbon emissions, but not automatically tackled by addressing them.
ESG investing has a long way to go, and perfection is a different goal. A change to the current system is needed to ensure that the most pertinent criteria are given the emphasis they warrant. But accountability is key and increased emphasis on emissions doesn’t mean we should remove the bar for other areas of performance completely.
By Budd Nicholson