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The term “environmental, social, and governance” (ESG) investing was first coined in the Freshfields Report, published in October 2005. The Report was instrumental in integrating the United Nations Environment Programme Initiative with the organization’s Sustainable Development Goals.
Since then, 88 percent of public companies in the United States have adopted ESG initiatives as of December 2020. Similarly, about two-thirds of private American companies have ESG investing goals Yet, critics abound regarding the utility of ESG investing practices. Public opinion is split on the practice, as 22 percent view the practice favorably, 19 percent negatively, and 59 percent have no opinion at all.
So, is ESG investing all it’s cracked up to be? To establish a fuller understanding of the issue, I asked several young professionals their opinions on ESG investing. Then, I distilled both their main points of praise and central criticisms to parse out what ESG investing does successfully and where it can be improved.
ESG Investing: What Has It Accomplished?
ESG investing was first introduced in an attempt to steer institutional capital toward common socially progressive goals for the benefit of all. But has ESG investing been successful in achieving these ends—or, instead, has it served as a tool for “greenwashing” the impact of otherwise socially or environmentally deleterious investment funds?
To date, ESG investing is said to have a transformative impact on the investing landscape and for ensuring corporate social responsibility. Here’s a short list of what proponents of ESG investing claim that it has accomplished:
1. Mainstream Acceptance and Market Growth
ESG investing has transitioned from a niche concept to a mainstream investment approach. In recent years, it has witnessed exponential growth, with investors increasingly recognizing the potential for financial performance and positive impact through ESG integration.
According to industry reports, global sustainable investment assets reached a record-breaking $35.3 trillion in 2020, reflecting a 15% increase from 2018. The expanding demand for ESG investment options has prompted financial institutions to develop specialized products and allocate resources toward sustainable finance.
2. Driving Corporate Responsibility
One of the significant achievements of ESG investing has been its role in fostering corporate accountability and responsible business practices. By considering environmental and social factors, as well as governance structures, investors have exerted pressure on companies to enhance transparency, disclose sustainability metrics, and improve their overall ESG performance.
This focus on sustainability has influenced corporate behavior, encouraging companies to prioritize responsible practices, such as reducing carbon emissions, diversifying their boards, and promoting diversity and inclusion.
3. Reshaping Risk Assessment
ESG investing has challenged traditional approaches to risk assessment by broadening the scope of analysis. Investors now recognize that environmental and social issues can have material impacts on companies’ long-term financial performance and resilience.
Incorporating ESG factors into investment analysis allows for a more comprehensive evaluation of risks and opportunities. As a result, investors are better equipped to identify potential pitfalls, such as climate-related risks, supply chain vulnerabilities, or reputational concerns, leading to more informed investment decisions.
4. Positive Impact on Stakeholders
ESG investing has contributed to positive societal change by directing capital toward companies and projects aligned with sustainable development goals. By focusing on ESG metrics, investors support businesses that prioritize environmental stewardship, social progress, and robust governance practices.
This capital allocation has the potential to address pressing global challenges, such as climate change, social inequality, and resource scarcity. Furthermore, ESG investing has driven innovation, spurring the development of new technologies and solutions aimed at creating a more sustainable and inclusive future.
ESG Investing: A Critical View from Millennial Perspectives
For this article, I decided to seek out the views of young professionals who will occupy positions of corporate responsibility over the next few decades. These are the decision-makers of both today and tomorrow, who deserve to have their opinion on ESG voiced. In all likelihood, the fate of ESG investing as an enterprise depends on their support moving forward.
Plus, as a Millennial myself, I certainly have my doubts and reservations about ESG investing; most all of which were shared by the interviewees I spoke to below.
Conrad Golly, (MoneyMainSt.com)
“As a 32-year-old Millennial entrepreneur in the finance industry, I believe that ESG investing, while initially a good idea, falls short in practice. It goes beyond climate-related scoring and often leads to manipulation to achieve a favorable score. We should explore alternative models that prioritize impact and inclusivity, going beyond surface-level assessments. Together, we can shape a future where finance truly becomes a force for positive change.”
Mansour Fatim, Co-Founder (Roowad.com)
“ESG investing is a positive step in the right direction, as it allows investors to align their investment with their values. [But,] it’s not always clear what criteria are used to determine a company’s ESG score. There is [also] a risk that companies may be able to game the system by appearing to be more socially responsible than they actually are.
In terms of reform, I believe that stricter regulations and better reporting standards could help to improve the accuracy of ESG scores. Additionally, there should be more transparency and accountability when it comes to how companies are evaluated. Overall, I think that ESG investing is a powerful tool for investors to use to make a positive impact on the world [and] with the right reforms in place, it could be an even more effective way to create social and environmental justice.”
Mike Pio Roda, Managing Director (The Creative VC)
“ESG investing is a positive step towards aligning investments with values but it often focuses more on intent than action. If you look at ESG ratings, a lot of it is inconsistent and you see it pretty clearly with the greenwashing, and the lack of active engagement from investors.
For a more proactive approach, impact investing or purpose-driven investing may be a better fit. It involves actively investing in companies that aren’t just avoiding harm, but are also working to create positive social and environmental impact aligned with an investor’s values. This requires a more nuanced understanding of the companies one is investing in, but it can lead to more substantial change and better alignment with investor values.”
June Jia, Master of Financial Mathematics (U. of Minnesota)
“The merits of ESG investing tend to outweigh the drawbacks, particularly for the Millennial and Generation Z cohorts. ESG investing reflects the core values of these generations, challenging the traditional notion of corporations existing purely for shareholder profit. These younger generations assert that companies should shoulder responsibility for issues like climate change, human rights, and ethical business practices.
However, ESG investing is not without its challenges. Notably, ‘greenwashing’ presents a significant issue. This involves companies portraying themselves as more eco-friendly or socially responsible than they truly are in a bid to lure investors. Such deceptive practices impede informed decision-making. There is also a lack of uniformity in the evaluation methods employed by different ESG rating agencies.
To enhance the effectiveness of ESG investing, a more standardized set of ESG criteria should be established across the industry. This would bolster transparency and enable more reliable comparisons between companies and sectors. Additionally, there should be robust mechanisms in place to evaluate the actual ESG actions companies take.”
Dom Wells, CEO (Onfolio)
“The biggest issue with ESG investing is the lack of standardized metrics and reporting frameworks. Without a universally accepted set of ESG criteria in place, investors are faced with inconsistency and ambiguity when evaluating companies. This gap makes it incredibly difficult to make meaningful comparisons and truly understand the impact of investments.
That said, ESG investing does have positives, even if it still has a long way to go. As more investors seek companies with strong ESG profiles, it creates incentives for businesses to develop and expand sustainable solutions. This, in turn, fosters innovation and drives positive change across sectors.”
While ESG investing simply considers environmental, social, and governance factors alongside financial performance, impact investing takes a more focused approach. In a nutshell, these investments generate measurable and positive social or environmental outcomes. This is achieved by aligning financial returns with specific goals and objectives. Rather than simply avoiding harmful practices, impact investments seek out opportunities to make a real difference.”
Asher Rogovy, Chief Investment Officer (Magnifina LLC)
“ESG investing a is noble concept in theory, but there are major problems with its implementation. Intangible notions of ethical conduct are difficult if not impossible to measure objectively. A number of specialist research firms attempt to quantify ESG factors using public data and consistent methods. However, any difference in method can result in wide discrepancies between analysts.
Additionally, ESG factors are subject to manipulation. One famous example is how Exxon, a company reliant on finite natural resources, was included in a sustainability index while Tesla did not qualify. If an ESG analyst counts carbon offsets instead of core business, comparing stocks using their ratings may be specious.”
My Perspective on ESG Investing
I echo the sentiments of many of the commentators I cited above. Any metric that can be doctored by ExxonMobile to have their stock included in a sustainability index is, in my opinion, fundamentally flawed. While I don’t think that ESG investing is a bad idea in and of itself, there are several key complaints I have regarding this scoring method:
- Lack of transparency in scoring
- Susceptibility to “greenwashing” and coverups
- Gatekeeps funding opportunities from companies that don’t meet otherwise opaque and inconsistent scoring evaluations
- Focuses more on intent than action or outcomes
Nonetheless, ESG investing is a worthwhile endeavor. With improvements, such as standardized criteria, transparent evaluation methods, and greater resistance to greenwashing, a truly outcome-oriented form of impact investing can be arrived at.
Final Verdict: A Flawed, Yet Enduring System of Investing
As a mechanism for driving corporate accountability, ESG investing remains a flawed yet not totally dismissable approach to investing.
There is little doubt that ESG investing has emerged as a forceful driver of change in the financial industry, leveraging investment decisions to foster sustainability and corporate responsibility. Its accomplishments include the mainstream acceptance of sustainable finance, increased corporate accountability, reshaping risk assessment, and generating positive societal impact.
Rather than doing away with ESG investing, we should start by reforming its aspects that have proven to not work as intended—namely, transparency mechanisms, irregular and opaque scoring criteria, and rampant greenwashing.
In short, while ESG investing can prod improvement at the margins, I’m unsure whether it can drive the systemic transformations needed to achieve ambitious social and environmental goals. As ESG investing evolves, investors, regulators, and companies must further collaborate to ensure transparency, consistency, and robust ESG frameworks. Only by doing so can ESG investing live up to its potential as a transformative force for sustainability.
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