The Conventional Wisdom On ESG Is Wrong. Now What? (2024)

FAQs

What is the problem with ESG? ›

One of the main challenges is that ESG scoring methodologies tend to focus on how well companies manage their internal processes, rather than the real-world impacts of their products and services.

To create a win-win, businesses should adopt a multi-stakeholder approach to address their complex ESG problems, by identifying and engaging with their key stakeholders, by understanding their perspectives and expectations, by building trust and mutual respect, by creating shared value and mutual benefits, and by ...

We find very little evidence that ESG ratings are related to global stock returns over 2001-2020. In other words, returns on investment are greater in companies that act badly, rather than those that act better.

Reframing 'ESG' through the key elements of: Stewardship – the actions of the investment manager to act as effective and responsible stewards of capital on behalf of clients; Sustainability – the analysis of sustainability related risks and opportunities as well as investee company behaviour, and now, Impact – the ...

Rising interest, says Matos, spurred investment managers — including the “big three” of BlackRock, State Street and Vanguard — to tout ESG-focused offerings, for both idealistic and practical reasons.

Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers.

Limited resources: Implementing ESG initiatives often require significant investments in time, money, and human capital, which can be challenging for companies with limited resources.

Fink won't say "ESG" anymore because, he says, it's been "weaponized." Asset managers are quieting down on ESG as part of a "greenhushing" trend. Some companies that made a big deal about their DEI efforts in 2020 are downsizing those, too.

The Key Pain Points

Developing Coherent Sustainability Strategies: The lack of a structured approach to sustainability often leads to fragmented efforts and ineffective communication. Demonstrating Commitment to Sustainability: Stakeholders are increasingly demanding concrete evidence of genuine sustainability efforts.

Companies with strong ESG performance can achieve lower cost of capital. They can gain access to cheaper debt and equity financing as financial institutions view them as lower risk. Companies also have a responsibility to not simply put profits first when there is a potential for environmental and social harm.

Why is everyone investing in ESG? ›

Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty. Companies that realign to the stakeholder capitalism agenda may have a competitive advantage over those that try to return to business as usual.

It refers to a set of metrics used to measure an organization's environmental and social impact and has become increasingly important in investment decision-making over the years. But while the term ESG was first coined in 2004 by the United Nations Global Compact, the concept has been around for much longer.

The global ESG and sustainability reporting focus is shifting from being largely voluntary to a mandatory disclosure landscape. Underpinning this shift is a patchwork of global regulations with various environmental, social and governance (ESG) disclosure requirements.

The Securities and Exchange Commission's new public company ESG disclosure rules may or may not survive court challenges, but the regulatory pressures on firms won't go away because they're driven by investor demand, a panel of experts agreed at a Tuesday webinar.

“Republicans and aligned groups are vehemently opposed to ESG,” says Poreda. “They view ESG as a subversive way to enact political and ideological goals through investing.

The researchers' findings indicate that when companies focus on nonmaterial ESG factors in their quarterly financial updates, investors interpret it as a negative sign, signaling potential issues like higher costs, inefficient resource use, and distracted management.

Financial sector companies worth $10 billion or more collectively showed the biggest drop in ESG-related statements year-on-year in the third quarter of 2023, down 20%. U.S. Republican politicians have targeted banks and asset managers that support the transition away from fossil fuels to cleaner forms of energy.

Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.

During its heydays, ESG was a dominant theme in elite gatherings such as the World Economic Forum. Financial firms launched ESG funds and business schools introduced ESG courses. Interest in ESG peaked in 2023 and its sharp decline seemed to have begun.