ESG should be boiled down to one simple measure: emissions
By Stephen Heins Three letters that won’t save the planet
ESG should be boiled down to one simple measure: emissions
By Stephen Heins
Three letters that won’t save the planet
Jul 21st 2022
If you are the type of person who is loth to invest in firms that pollute the planet, mistreat workers and stuff their boards with cronies, you will no doubt be aware of one of the hottest trends in finance: environmental, social and governance (esg) investing. It is an attempt to make capitalism work better and deal with the grave threat posed by climate change. It has ballooned in recent years; the titans of investment management claim that more than a third of their assets, or $35trn in total, are monitored through one esg lens or another. It is on the lips of bosses and officials everywhere.
You might hope that big things would come from this. You would be wrong. Sadly those three letters have morphed into shorthand for hype and controversy. Right-wing American politicians blame a “climate cartel” for soaring prices at the petrol pump. Whistleblowers accuse the industry of “greenwashing” by deceiving its clients. Firms from Goldman Sachs to Deutsche Bank face regulatory probes. As our special report this week concludes, although esg is often well-meaning it is deeply flawed. It risks setting conflicting goals for firms, fleecing savers and distracting from the vital task of tackling climate change. It is an unholy mess that needs to be ruthlessly streamlined.
The term esg dates as far back as 2004. The idea is that investors should evaluate firms based not just on their commercial performance but also on their environmental and social record and their governance, typically using numerical scores. Several forces have thrust it into the mainstream. More people want to invest in a way that aligns with their concerns about global warming and injustice. More companies, including a sister firm of The Economist, offer esg analysis. With governments often gridlocked, many people feel business should solve society’s problems and serve all stakeholders, including suppliers and workers, not just shareholders. And then there is the self-interest of an asset-management industry never known to look a gift horse in the mouth: selling sustainability products allows it to charge more, easing a long blight of falling fees.
Unfortunately esg suffers from three fundamental problems. First, because it lumps together a dizzying array of objectives, it provides no coherent guide for investors and firms to make the trade-offs that are inevitable in any society. Elon Musk of Tesla is a corporate-governance nightmare, but by popularising electric cars he is helping tackle climate change. Closing down a coalmining firm is good for the climate but awful for its suppliers and workers. Is it really possible to build vast numbers of wind farms quickly without damaging local ecology?
By suggesting that these conflicts do not exist or can be easily resolved, esg fosters delusion.