No, ESG is Not the Devil Incarnate
Why Environmental, Social and Governance (ESG) investing will not only survive, but thrive
The practice of using environmental, social and governance (ESG) data to inform investment analysis and buy/sell decisions for stocks, bonds and other investments has been the bread and butter of socially responsible investing for decades.
Divestment: Avoiding the Bad
Early use of ESG was mostly focused on “negative screening”. Religious organizations led the charge by divesting of ‘“sin stocks” in the tobacco, alcohol and gambling industries. The 1980’s protests against South African apartheid accelerated the use of ESG investment practices and demonstrated the collective power of using the capital markets as a tool to effect positive change in both corporate and governmental policies.
Integration: Divestment, Investment and Engagement
Growing demand for company ESG data and disclosures normalized the reporting of greenhouse gas emissions, use of chemicals and pesticides, workforce diversity and compensation/benefits practices, supply chain risks and regulatory reporting violations. Companies are now compelled to produce and pay attention to this data as it presents headline risks and the potential loss of not only investors but customers, sales and profits.
Over time, ESG data analysis became a tool to not only screen out poor ESG performing companies, but also to identify companies exhibiting leadership in improving ESG business practices.
Along the way, the myth that ESG based investing strategies underperform due to higher costs of better ESG management and reporting has been consistently disproven by a multitude of longitudinal studies.
Political & Corporate Backlash
A small but vocal group of business and political leaders seem to be increasingly threatened by the prevalent use of ESG data to hold businesses accountable for their impact on workers, society at large and the environment. For example, Elon Musk garnered much attention last year by infamously tweeting (X’ing?!):
“I am increasingly convinced that corporate ESG is the Devil Incarnate.”
This tweet was followed over a period of months by additional comments and posts dismissing the entire premise of ESG investment analysis as not only ineffective, but evil. A manifestation of the “woke mind virus” of progressive ideals and values Musk claims is the root of America’s societal problems.
More recent efforts include the Republican-led U.S. House Financial Services Committee spending much of its summer 2023 sessions focused on ESG related hearings. Driven by a fringe faction that has made “woke capitalism” and ESG a central focus of their culture war narrative. A story arc that also includes other purported evils like same sex marriage, abortion rights and even drag shows.
But There’s no There There
These anti-ESG efforts have been amplified by the media as they make for click worthy headlines that drive ad revenue. However, on the whole, the anti-ESG crowd has been only mildly successful in slowing the growth of ESG adoption and investment.
“…a Russell Investments survey of asset managers last year found that 82% of U.S.-based asset managers systematically incorporate ESG information in their investment process. The percentage approaches 100% in the United Kingdom and Europe.”
In the long run, ESG investment practices are destined to prevail for the many reasons that are well articulated by Morningstar’s Leslie Norton. Perhaps most importantly is that using ESG data and analysis is simply a better, mainstream practice for managing investment risks and identifying investment opportunities.
