What is the controversy with ESG investing?
ESG Controversy
Critics say ESG investments allocate money based on political agendas, such as a drive against climate change, rather than on earning the best returns for savers. They say ESG is just the latest example of the world trying to get “woke.”
One of the main challenges is that ESG scoring methodologies tend to focus on how well companies manage their internal processes, rather than the real-world impacts of their products and services.
ESG Risks: Focus 2023
We outlined the prominent risks in 2023: social risks, with layoffs and strikes gaining attention; environmental risks, marked by wildfires and oil spills; and governance risks, where tax evasion and ethical violations like bribery were in focus.
Advocates argue that ESG integration leads to better long-term financial performance and helps address global challenges. Critics, on the other hand, argue that ESG can be subjective, difficult to measure, and may distract from a company's primary goal of generating profits.
Critics portrayed ESG investing as primarily motivated by political concerns and a potential drag on returns. Additionally, some critics have raised concerns about the complexity and reliability of ESG metrics.
Musk himself became a vocal critic of ESG ever since Tesla was first booted from the S&P 500's sustainability index a year ago. After Fortune reported some two weeks later about allegations over fraudulent ESG investing by Deutsche Bank, Musk claimed all ESG lists were suddenly fraudulent.
Over the past decade or so, ESG edicts became embedded into corporate America's ecosystem as big shareholders —BlackRock, but also places like Vanguard and Fidelity — and the shareholder advisory firms like ISS and Glass Lewis increasingly voted in favor of these mandates that pushed companies to reduce their carbon ...
The first group to coin the phrase ESG was the United Nations Environment Programme Initiative in the Freshfields Report in October 2005.
By considering ESG factors, investors get a more holistic view of the companies they back, which advocates say can help mitigate risk while identifying opportunities.
What is the backlash of ESG?
In 2023, U.S. companies have faced an unprecedented level of ESG backlash from both anti- and pro-ESG sides which has had a paralyzing effect across organizations. With the upcoming U.S. elections in November 2024, ESG backlash is only expected to increase.
The consequences are that investors accounts suffer, and resources and capital are directed away from the oil and gas industry. The average American's retirement account, when invested with ESG criteria in mind, is being used to further a political agenda, not bring about the best return and savings for the client.
- ESG Governance Issues. ...
- Scope 3 Emissions. ...
- 'Walking The Talk' ...
- Culture Change. ...
- Forming Partnerships. ...
- Ethics: Compliance Regulations.
Key Takeaways. Retail investors do care a lot about the ESG-related activities of the firms they invest in, but only to the extent that they impact firm performance, independent of ESG performance.
Dimensional, Vanguard, T. Rowe Price and Fidelity received an A grade for pushing back against ESG-mandated initiatives that have swept across the investment sector. “Our research indicates that ESG investing does not have any advantage over broad-based investing,” Vanguard CEO Tim Buckley told Financial Times.
ESG stands for Environmental, Social and Governance. This is often called sustainability. In a business context, sustainability is about the company's business model, i.e. how its products and services contribute to sustainable development.
Rightly or wrongly, ESG (environment, social and governance) has become a political issue. Proponents never intended it to end like this, but here we are. Why? Because of its impact on the way people spend money.
The term ESG was popularly used first in a 2004 report titled "Who Cares Wins", which was a joint initiative of financial institutions at the invitation of the United Nations.
The billionaire chief of BlackRock, which manages upwards of $9 trillion in assets, pioneered the idea of ESG before it became a buzzword in investing. ESG covers a broad spectrum of topics—from climate change to diversity to inclusion initiatives.
A spokesperson for the S&P 500 ESG index explained a few factors contributing to Tesla's removal, including a lack of low-carbon strategy and codes of business conduct, racial discrimination, poor working conditions, as well as product responsibility.
Why are companies doing ESG?
First, an ESG focus can help management reduce capital costs and improve the firm's valuation. That's because as more investors look to put money into companies with stronger ESG performance, larger pools of capital will be available to those companies.
Tesla was given an ESG score of 37 out of 100, while Philip Morris was scored an 84. This isn't the first time that Musk has spoken out against ESG. In addition to tobacco companies, Tesla also scored lower than fossil fuel companies like Shell and Exxon.
ESG investing for LGBTQ+ diversity and inclusion
The companies included in the index have policies supporting equality for gender and sexual orientation.
“I don't use the word ESG any more, because it's been entirely weaponized ... by the far left and weaponized by the far right,” Reuters quoted Fink as saying at the Aspen Ideas Festival in June. He clarified, however, that his commitment to the underlying issues remains unchanged.
Goodman says “sustainability” is a more accurate term than “ESG” for assessing a board's responsibility for long-term value creation. He says sustainability is a part of every aspect of a company and as a result plays a role in overall corporate strategy and risk management.
