By 2025, ESG investing may account for $53 trillion, or 1/3, of assets under management. Here are four key questions for combatting the greenwashing this much money will inevitably encourage.
1 – Does ESG Investing Generate Higher Intrinsic Returns To Investors?
ESG investing values environmental, social, and governance factors in addition to pure financial returns.
A Better Mousetrap?
Much research has found that ESG Investing generates higher intrinsic returns than traditional investing (mostly).
If this is true, it will be case closed in favor of such investing.
Not so fast…
Two Types of Greenwashing
Time and experience may shed more light on ESG’s intrinsic returns. In the meantime, we must contend with smoke and mirrors.
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Overhyping ESG investing represents a second type of greenwashing.
If Time Will Tell, Let Time Tell
If ESG investing actually produces higher intrinsic returns, time will tell.
Like cream, “true” ESG investing will rise to the top.
Thus, it might be argued that ESG investing should not be mandated, or even encouraged. Market forces will drive adoption of better business models. Think of continuous-improvement manufacturing, Internet commerce, process digitalization, and artificial intelligence.
2 – Does ESG Investing Generate Higher Overall Returns To Investors?
Even if ESG investing doesn’t generate higher intrinsic returns, it might generate higher overall returns.
That’s because businesses focused on maximizing shareholder value cannot chase profits heedless of reputational blowback.
If ESG investing represents a form of goodwill advertising, it might conceivably maximize higher overall returns.
But, this also implies some limit to ESG advantages due to diminishing returns.
It is also calls for standardizing ESG concepts and terminology to avoid deliberate or inadvertent greenwashing.
3 – Should Investment Managers Concern Themselves With Something Other Than Returns To Investors?
If ESG investing generates neither higher intrinsic nor overall returns, a fiduciary manager of a traditional for-profit entity must typically eschew it.
Exxon management recently lost a proxy fight in which at least to “activist” directors gained Board seats. These new directors want Exxon to become carbon neutral by 2050.
If these directors’ motives don’t focus on maximizing shareholder value, they may well get sued, and perhaps rightly so.
The reason is that New Jersey law establishes a specific for-profit corporate form — the Benefit Corporation — which permits directors and officers to balance maximizing shareholder wealth with societal and environmental goals. With Benefit Corporation status come specific reporting and disclosure obligations.
In giving shareholders a choice between Benefit and non-Benefit Corporations, New Jersey law may arguably compel corporate fiduciaries whose companies have not elected Benefit Corporation status to maximize shareholder value. (Opinions on this point differ, however.)
The upshot is that fiduciary investment managers embracing ESG for reasons other than maximizing shareholder wealth need a lawful basis for doing so.
Where that exists, the managers also need standardized definitions and terminology. Such managers also need frameworks for considering how to balance competing claims for, and types of return on, their organization’s capital.
In this regard, how does one allocate investments and measure returns among E, S, and G? Among the various flavors and causes of each of E, S, and G?
For example, is it better to leave an African village in darkness, or to provide it with carbon-emitting generators? Should a pristine coastline be left alone, or dotted with offshore windmills?
4 – Who’s Greenwashing Whom?
A U.S. Senator once asked former Gambino Family Underboss Sammy “The Bull” Gravano how to get the Mob out of professional boxing. Gravano answered, “Make the purses very small.”
The purses in global investment management are enormous.
With so much at stake, people on all sides of this issue face conscious temptations to lie, cheat, and steal. But unconscious truth shading, from confirmation bias, ethical fading, and fallacies/rationalizations, may also flourish.
No one is above temptation nor free of foibles. So, perhaps we should approach the above four questions with due respect for opposing views, and well as a healthy skepticism of all motivations, including our own.