Analysis: ESG Investing Isn’t Designed to Save the Planet
It’s long past time we faced a hard truth: despite a historic surge in popularity, ESG (environmental, social, and governance) investing will not tackle our generation’s urgent environmental and social challenges. Consider the battle against climate change: Estimates are that humanity will need to invest an average of $3.5 trillion annually over the next 30 years. Unfortunately, these trillions are not the same trillions that are presently invested in assets managed according to many forms of ESG investing — those are dedicated to assuring returns for shareholders, not delivering positive planetary impact.
The separation of profit and planet is by design. ESG ratings which underlie ESG fund selection are based on “single materiality” — the impact of the changing world on a company’s profits and losses, not the reverse. They also bear no connection to natural boundaries. According to Bloomberg, “[ESG] ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders.”
Yet it’s hard to blame casual observers for believing that investing in an ESG investment fund is helping to save the planet. Marketing materials of ESG funds often make lofty statements about social or environmental aspirations, but the fine print reveals that the real goal is to assure shareholder profits. For example, a prior statement from State Street’s ESG Investment Statement mentions the need to encourage a “transition to a low-carbon, more sustainable, resource-efficient and circular economy,” but later it defines ESG issues as “events or conditions that, should they occur, could cause a negative impact on the value of an investment.” According to Henry Fernandez, CEO of the leading ESG ratings provider MSCI, ESG doublespeak has confused most individuals, many institutional investors, and even some portfolio managers.