How To Make ESG Investing Real And Meaningful

Attendees at the World Economic Forum in Davos last week made frequent mentions of ESG. An acronym for Environmental, Social and Governance Issues, ESG has become an abbreviation for what was formerly known as ‘corporate social responsibility’ or ‘sustainability’. Judging by the programs and conversations at Davos, there is growing sentiment in at least some regions that global companies need to pay more attention to goals beyond maximizing short-term economic returns for investors. I’m here.

The ESG discussion can sometimes seem confusing because the concept actually has two different meanings. Many companies refer to ESG as the umbrella of their good work, from supporting charities to reducing their carbon footprint. In the investment world, ESG is now commonly used to describe mutual funds and exchange-traded funds (ETFs) designed to direct capital to companies that meet certain positive criteria. In either context, ESG advocates tend to focus primarily on the environment, and in particular on what companies can do to slow global warming. Less attention is paid to social concerns such as worker welfare in global supply chains.

Companies such as BlackRock, State Street and Vanguard, the largest institutional investors, are now aggressively promoting ESG funds as a way for clients to invest in companies that protect people and the planet. Big financial firms also typically promise that ESG investments will deliver returns comparable to traditional funds. Based on this marketing, ESG funds have grown dramatically since the term was coined in 2004, and by some calculations are now worth close to $35 trillion globally, or total assets under management in the US and Western Europe. account for about one-third of

In 2022, the amount invested in ESG funds will decline slightly for the first time in a decade. This is the result of an overall market downturn, the war in Ukraine and criticism of his ESG investments by some conservatives. According to Refinitiv, ESG funds lost an average of 18% last year, trailing the overall market, which lost an average of 15.5%. This is because many of his ESG funds were heavily reliant on tech companies whose stocks were underperforming in 2022, and less on well-performing fossil fuel companies.

Despite this cooling down, the growth of ESG funds over the past 15 years has often attracted not only breathtaking coverage in the financial media, but also skepticism. Conservative Republicans like Florida Gov. Ron DeSantis and Texas Gov. Greg Abbott have called ESG “awakened capitalism,” and BlackRock funds have adopted his ESG. In retaliation, we are taking steps to withdraw state pension funds. In the growing culture wars he said we will see more of this activity in the coming months as ESG becomes yet another wedge issue.

ESG has also been criticized, especially for S, for good reason that there is no common definition. Inadequate data; and inadequate systems for assessing compliance and building accountability. There is a big gap between how investment firms such as BlackRock and State Street market his ESG funds and what they actually measure. The inclusion of fossil fuel companies in many ESG investment portfolios is one of many examples of this disconnect.

Some critics even say that the current implementation of ESG is flawed and should be blown away. disagree. ESG investing has the potential to improve significantly, but if properly defined and applied, ESG frameworks provide investors committed to environmental and social progress with a means of evaluating companies on a common basis. has the potential to provide Achieving this goal, however, will require a more serious and ambitious effort by companies touting ESG investing and publicly traded companies in general.

For ESG to realize its potential, three things need to change. First, investors and companies alone cannot set the standard. Other stakeholders, such as civil society organizations and academic experts, should be involved. Today, investors are self-defining S in her ESG investment framework, and companies are doing the same with their own descriptions of corporate behavior. Either way, this allows you to pursue issues you feel more comfortable with and use your own internal measures of progress and compliance. When it comes to human rights issues such as labor rights in global supply chains, neither corporate representatives using ESG language to describe responsible behavior nor financial firms touting ESG as an investment strategy have specific compliance standards. responds negatively to proposals to formulate

Second, ESG discussions should focus on core business operations rather than how companies respond to the controversial political and social issues of the day. A company may be compelled to intervene on high-profile issues, but the response should not be part of his ESG framework. ESG should focus on measuring a company’s performance against well-defined criteria. For example, E for carbon emissions, S for treatment of workers, including supply he chain. Company leaders have to decide whether to speak up or not. On controversial social and political issues such as voting rights, guns and reproductive rights. However, decisions about whether and how to do so should not be part of the ESG framework.

Finally, once common ESG criteria are developed, they should be accompanied by meaningful rating systems based on more and better data on company performance. Part of this data collection should focus on internal corporate commitments and management systems and conduct due diligence on internal processes. But having a better system doesn’t necessarily mean better performance. For example, for companies with large global supply chains, we discuss issues such as workplace health and safety, child and forced labor, and other issues that affect worker well-being and the environmental impact of business operations. , requires a more rigorous and transparent evaluation.

Fortunately, governments, especially in Europe, are moving in this direction. Earlier this month, Germany’s new supply chain law came into force. All companies with an annual turnover of 150 million euros are required to report on labor and environmental performance in their global supply chain. Some EU states have also adopted mandatory due diligence laws. Although the term due diligence is not yet clearly defined, including the concept in binding national law opens the door for a more standards-based approach. The EU has also adopted the Digital Services Act. This calls for greater transparency about issues such as how large tech companies deal with content moderation.

In the United States last year, the Securities and Exchange Commission proposed new reporting requirements for carbon emissions. We received a lot of comments and are currently finalizing. This year, the SEC plans to propose her second rule on human capital. The rule is expected to include reporting requirements for worker diversity and well-being in global supply chains. With calls from governments for more and better data disclosure and more general regulatory oversight, ESG has become a meaningful metric for determining which companies are leaders in protecting people and the planet. may develop into

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