Why is ESG investing under political fire?
Former vice president Mike Pence penned an op-ed for the Washington Post earlier this year expressing his objections to ESG, decrying the bias inherent to its evaluation. Other politicians have labeled it a “scam,” and even taken the step to eliminate ESG considerations from state pension investments.
The argument submitted by critics, in a nutshell, is that heavy-handed regulation under the name of “environmental extremism” is stalling current and future economic growth. However, the disconnect with this viewpoint is that – as Andew Petillon, former SEC attorney, pointed out in a response to the Washington Post column for Slate – it is politicians who are trying to override the free market, where millions of investors have decided ESG is what they want.
To that end, Petillon noted that ESG investing has been substantiated as a smart strategy: studies by Morgan Stanley and Vanguard found that investments based on ESG performed either better, or as well as, non-ESG investments.
But the validity of this anti-ESG movement isn’t really the point. What matters is the consequence. Will the underlying mechanisms of ESG strategy be altered in the years to come, especially if more of its detractors gain political sway?
Why ESG isn’t going away as an investment priority
For all of the country’s divisions along political lines, this doesn’t seem to be one of them: a survey last year found broad bipartisan support for corporate ESG efforts.
This is the main reason it’s almost impossible to envision ESG losing its place as a massive investment and business growth priority. The battle against climate change is increasingly one that unites us as a society and as a species.
“This report suggests political stereotypes underestimate the consensus,” observed Tessa Recendes, one of the authors of the research. “The insights gained from analysis of this survey indicate that, although there are differences in terms of political affiliation and viewpoints on ESG issues, it is not nearly as polarized as popular narrative suggests.”
It’s only natural there would be contrasting opinions and philosophies on the best ways to approach ESG policy, but few people seem to believe these criteria should not exist.
“I detect no groundswell of opposition to ESG in the investment industry,” wrote Dr. Jon Hale, Global Head of Sustainability Research at Morningstar, Inc., in a recent article. He notes that in one recent survey, 85% of asset managers indicated that ESG has become a priority for them. Another survey found that a large majority of asset owners believe ESG to be financially relevant to the investment process. Companies everywhere are seeing the essential benefits of a strong ESG position.
That’s not to say there isn’t significant room for improvement in terms of how ESG is approached, measured, and managed.
The current ESG landscape is far from flawless
In September, the headline for a guest essay in the New York Times made waves: One of the Hottest Trends in the World of Investing Is a Sham. The “hot take” column from Hans Taparia of the New York University Stern School of Business was not a dismissal of ESG’s fundamental purpose, but rather a more measured critique of methodologies driving the system as it currently exists.
“Wall Street’s current system for E.S.G. investing is designed almost entirely to maximize shareholder returns,” Taparia wrote, “falsely leading many investors to believe their portfolios are doing good for the world.”
At the core of his disillusionment is the chaotic ESG ratings industry. On our blog, we have previously explored the shortcomings and pitfalls of ESG scores, which have been plagued by a lack of consistency and alignment.
Improving the way ESG is measured – striving for greater comparability, clarity, and meaningfulness – is a prime focus for the industry at large right now. And that is where our attention and energy should be directed: building upon the progress that’s been made, not dismantling it.
ESG hysteria is a passing fad
For those of us who work in the field of business sustainability, it can be frustrating to hear the subject of our purpose and passion be described as “extreme” or “radical.” Climate change is a scientifically proven phenomenon, and the urgency to counteract its impacts is no passing fad or political agenda. Emerging generations are more conscious of environmental and social issues than any before them, and will only come to occupy more of the investing (and policy-shaping) populations going forward.
The continued rise of ESG as a highly influential investing criteria is not suppressing the free market. It is being driven by the evolving will of the free market.
Thus, when it comes to determining how your ESG initiatives should be handled amidst all of this swirling political turmoil, the advice is simple:
Stay the course, full steam ahead.
