Because ESGs are overrated. Word of the Economist
According to the Economist, the abbreviation ESG should be reduced to a single letter: the "e" of "emissions". Here because
If you're the type of person who doesn't like investing in companies that pollute the planet, mistreat workers and stuff their boards with cronies, you will undoubtedly know one of the hottest trends in finance: environmental, social and governance investments ( esg). It is an attempt to make capitalism work better and to address the grave threat posed by climate change. In recent years it has had a surge; Investment management titans argue that more than a third of their assets, or $ 35 billion in total, are monitored through one ESG lens or another. It is on the lips of leaders and officials around the world.
You might hope that great things will come out of all of this. You would be wrong. Unfortunately, these three letters have turned into a buzzword for the hype and controversy. Right-wing US politicians accuse a "climate cartel" for rising gas pump prices. Whistleblowers accuse the industry of "greenwashing", deceiving their customers. Companies, from Goldman Sachs to Deutsche Bank, are facing regulatory investigations. As our special report this week concludes, although the ESG is often motivated by good intentions, it is deeply flawed. It risks setting contradictory goals for companies, robbing savers and distracting from the vital task of tackling climate change. It is a mess that must be mercilessly rationalized – writes The Economist .
The term esg dates back to 2004. The idea is that investors should rate companies not only based on their business performance, but also based on their environmental and social performance and governance, typically using numerical scores. Several forces have pushed it to become a mass phenomenon. More people want to invest in a way that aligns with their concerns about global warming and injustice. More companies, including an Economist subsidiary, offer ESG analysis. With governments often stalled, many believe businesses need to solve society's problems and serve all stakeholders, including suppliers and workers, not just shareholders. And then there's the self-interest of an asset management industry that you don't look in the mouth: Selling sustainable products allows it to bill more, alleviating the long plague of falling commissions.
Unfortunately, the ESG suffers from three fundamental problems. First, because it bundles a dizzying array of goals, it doesn't provide consistent guidance for investors and businesses to make the trade-offs that are inevitable in any company. Tesla's Elon Musk is a corporate governance nightmare, but by spreading electric cars he's helping tackle climate change. Closing a coal mining business is good for the climate, but terrible for its suppliers and workers. Is it really possible to quickly build large numbers of wind farms without harming the local ecology? By suggesting that these conflicts do not exist or can be easily resolved, esg fosters delusion.
The second problem of the industry is that it is not sincere about incentives. He argues that good behavior is more profitable for companies and investors. In fact, if you can handle the stigma, it is often very profitable for a company to outsource costs, such as pollution, to society rather than bear them directly. Consequently, the link between virtue and financial performance is suspect. Finally, the ESG has a measurement problem: the various scoring systems have significant inconsistencies and are easily bypassed. Credit ratings have a 99% correlation between the various rating agencies. Conversely, ESG ratings are just over half the time. Businesses can improve their esg score by selling assets to another owner who continues to run them as before.
Investors are increasingly skeptical of these frauds. This, coupled with the financial market turmoil, is slowing the inflow of money into sustainable funds. It is therefore time to reconsider. The first step is to disaggregate the three letters: e, s and g. The more goals there are to achieve, the less chance there is of hitting one of them. As for the letter s, in a dynamic and decentralized economy individual firms will make different decisions about their social conduct in pursuit of long-term profits within the law. Tech firms can appeal to the values of young employees to retain them, while firms in declining industries may be forced to lay off. There is no single model. The art of management, og, is too subtle to be captured by a box. UK publicly traded companies have an elaborate code of governance and poor performance.
It is best to simply focus on and. But even this is not accurate enough. Environment is an all-encompassing term, which includes biodiversity, water scarcity, and so on. By far the most significant danger is emissions, particularly those generated by carbon producing industries. Put simply, the e should not indicate environmental factors, only emissions. Investors and regulators are already pushing to make corporate issuance disclosure more uniform and universal. The more standardized they are, the easier it will be to assess which companies are big carbon emitters and which are doing more to reduce carbon emissions. Fund managers and banks should be able to better monitor the carbon footprints of their portfolios and whether they shrink over time.
Unsustainable
Better information alone will help in the fight against global warming. By more accurately revealing which companies are polluting, it will help the public understand what really makes a difference to the climate. An increasing number of selfless consumers and investors may choose to favor clean businesses even if it comes with a financial cost. And while they can get away with polluting today, many companies and investors expect tougher carbon regulation sooner or later and want to measure their risks and adapt their business models.
But don't go wrong: tougher government action is now essential. We have long supported the need to raise the prices of carbon emissions to exploit the market and save the planet. Charging systems now cover 23% of global emissions, about double what they were five years ago. But much more needs to be done, not least in America. It is government action, coupled with clear and consistent disclosure, that can save the planet, not an abbreviation that risks being synonymous with exaggerated and superficial nonsense.
(Extract from the press review of eprcomunicazione)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/energia/economist-esg/ on Sat, 30 Jul 2022 06:05:46 +0000.