Counterintuitively, ESG ratings reward companies that are likely to profit in the climate crisis — not those who are doing the most to fight it.
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August 01, 2022
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Summary. Most people assume that ESG Investing is designed to reward companies that are helping the planet. In fact, ESG ratings which underlie ESG fund selection are based on “single materiality” — the impact of the changing world on a company P&L, not the reverse. Asset management firms have been happy to let the confusion go uncorrected — ESG funds are highly popular and come with higher management fees. The danger with ESG investing is that it might convince policy makers that the market can solve major societal challenges such as climate change — when in fact only government intervention can help the planet avoid a climate catastrophe.
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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.
Read more on Investment management or related topics Finance and investing and Sustainable business practices
Kenneth P. Pucker is a professor of practice at The Fletcher School at Tufts University and was formerly the chief operating officer of Timberland.
Andrew King is the Questrom Professor in Management, Strategy and Innovation at Boston University.
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Read more on Investment management or related topics Finance and investing and Sustainable business practices
