I have made no secret of my disdain for ESG, an over-hyped and over-sold acronym, that has been a gravy train for a whole host of players, including fund managers, consultants and academics.
That quote is how Aswath Damodaran, Professor of Finance at NYU, starts this article on the state of ESG (environmental, social and governance) investing. ESG, also known as impact investing or sustainable investing, aims to use investment to not only make a financial return but to also create positive change in society.
The theory goes that by only investing in companies that make a positive impact, you create an incentive for corporate leaders to improve the performance of their companies. A classic example that we can point to in Australia is Woolworths. Australia’s largest supermarket demerged its liquor and pubs business, with all of its poker machines, in a large part to attract the investment of large, ESG-focused funds.
In this article, Damodaran looks at climate investing and asks whether the trillions of dollars allocated over the past decade has moved the needle. He also looks at whether impact investing changes the incentives or the behaviours for the people operating companies.
One thing we find in many anti-ESG investors’ views is a level of absolutism. As Damodaran finishes his article, “After 15 years, and trillions invested in its name, impact investing, as practiced now, has made little progress on the social and environmental problems that it purports to solve.” We understand the sentiment, but it strikes us as a bit reductive. We would suggest that no-one in the impact investing space is arguing that their efforts alone will change the world.
Instead, fundamentally changing the world’s energy system in less than a generation is going to take a whole-of-society effort. And an industry that cumulatively invests trillions of dollars every year certainly has an important part to play in those efforts. But without the support of government policy, and the cooperation of governments around the world, the efforts of fund managers and investors will only account for so much.
Ultimately, we find ourselves somewhere in the middle on this debate around ESG and impact investing. It is important to recognise it’s shortcomings and to approach the topic with your eyes wide open. But at the same time, there are more and more case studies where shareholder pressure is arguably driving change within companies – Woolworths demerging Endeavour, BHP getting out of fossil fuels, AGL’s attempt to split its business into Accel and AGL – and those case studies cannot be ignored.
If you’re interested in going deeper on this debate around ESG, listen to our interview with Kelly Shue, Professor (Adjunct) of Law at Yale Law School and a Professor of Finance at the Yale School of Management, titled Is ESG investing counterproductive?
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