What does “ESG” really mean?

ESG Meaning YouTube Thumbnail

Here is a summary about a panel’s presentation from Adam Lerner in this note:

ESG: three letters that unify a concept while obscuring a multiplicity of meanings and intentions.

What are the implications when those leading a field don’t share definitions? On this panel, five leaders from some of the largest organizations in the world (3 of whom have ESG in their job titles) discuss how to “make sustainability” part of their corporate cultures. The panel’s presentation often conflates ESG and sustainability—which further perpetuates one of the crises of the field noted by Bill Baue, Duncan Austin, Gillian Marcelle, PhD, Alison Taylor and others. The five panelists all had different definitions of ESG with some of them being discouragingly murky.

It was in this context that I particularly appreciate the clarity provided in this Institutional Investor article by Andrew King & Ken Pucker that serves the ESG field on a number of important levels https://bit.ly/3LACQvs. King & Pucker interviewed more than a dozen investment professionals to investigate their claims about ESG performance: it produces higher profits, signals higher stock returns, lowers capital costs, and attracts investment flows (note that none of those performative factors claim positive planetary impact).

The authors:
1. Recognize that there is not one ESG investment strategy but rather five categories with very different approaches and intentions (only two of which may have anything to do with sustainability—see image in particular for the tiny sliver that is “impact”)
2. Demystify the question of whether ESG funds deliver outsized market returns known as “alpha” (no, and high profit does not equate to high market returns)
3. Differentiate between “deep green” and “light green” ESG investing signalling active vs passive engagement by funds (no surprise that the passive “light green” is where the bulk of the growth is)
4. Find that despite differing strategies, funds in different categories often end up with similar holdings (Microsoft, Amazon, Alphabet, Apple, etc.)
5. ESG labelled funds are a self-perpetuating engine (the label attracts investment which thereby boosts asset prices)

“Trillions of dollars are now invested in light-green ESG funds, and there is little evidence that they will deliver planetary impact or the promised higher returns. What harm will this do?”

King & Pucker find that not only are the blindspots shared across most ESG funds that rely on similar data sources and therefore have no informational competitive advantage over one another (a motivation to deeply invest in remediating cognitive blindspots) but that these very myths justify regulatory inaction.

E-S-G creates “false hope, oversells its capacity to outperform the market, and likely contributes to the delay of long-past-due regulatory action.” For those interested in actually impacting social and planetary health rather than marketing investment funds, the authors find that E-S-G is doing more harm than good.