Do Good? Not with ESG
If you have young children (or grandchildren, as I do), then you probably well up with pride when you see them share with or help another kid. The fact is, we want them to be kind, do good. We all instinctively want to do good. And so we grown-ups teach our youngsters that doing good is - - well - - good.
When savers consider environmental, social, and governance investing (commonly called “ESG”), most believe that they’re doing some good compared with traditional investing. The rub is, ESG is not about doing good.
In a 2022 piece, sustainability analyst Hortense Bioy calls out “people who inappropriately conflate sustainability [read, “ESG”] and ethics.”
Climate consultant Kate Mackenzie draws attention to “the longstanding dichotomy between climate-focused investing done for ‘moral’ reasons (harming the planet is a bad thing to do) versus ‘financial’ reasons (harming the planet means less profits).”
Most investors who consider ESG are motivated to do something good for people and/or the planet. They believe, or want to believe, that, in contrast to traditional investing, ESG can do that.
But ESG is not about ethics, and financial considerations differ from moral ones. ESG is a financial strategy. It focuses on risks to companies’ earnings.
But because it looks at environmental, social, and governance risks, mitigating them can sound like doing good. This isn’t to say that ESG can’t do good. Only that that’s not its objective. ESG can do good, but don’t conflate them, and don’t rely on it for that.
An instructive way to compare traditional investing and ESG appears in the following table from an article about impact investing (again, read as “ESG,” although different).
|
Traditional Investing |
Impact Investing |
|
|
Goals |
Making money |
Making money and doing good |
|
Primary criteria of security selection |
Profitability |
Profitability and ability to deliver nonfinancial impact aligned with the investor’s values |
|
Nonfinancial impact (social and/or environmental) |
Side effect but not sought per se |
Intentional |
|
Impact measurement |
No |
Yes and planned |
You can imagine a 3rd column to the right that would look something like this:
|
Philanthropy |
|
|
Goals |
Doing good |
|
Primary criteria of security selection |
Impact |
|
Nonfinancial impact (social and/or environmental) |
Intentional and exclusively |
|
Impact measurement |
Yes and planned |
We’re familiar with traditional investing on the one hand, and philanthropy on the other. One is about making money, the other doing good. The promise of ESG is that it delivers on both making money and doing good. That is alluring. It’s having your cake and eating it. Don’t get sucked in by the glitter.
Theoretically, investing should be able to deliver on both. I refer you to my colleague’s post, The ESG Moment of Truth, specifically to his graphical rendition of the “balance of doing good vs. making a profit.”
In my humble opinion, if select investing strategies can do measurable good, they are worthy of investors’ attention and dollars. After all, we instinctively want to do good.
