Alana Benson, NerdWallet
ESG, or environmental, social and corporate governance criteria, has become a lightning rod for contention. The right says it’s woke hogwash, and the left says it can save the planet. But few can say what ESG has actually done.
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Why can’t we measure in polar bears?
If you’re putting in the effort of researching companies, deciphering ESG scores and choosing investments, you probably want to know what your dollars are actually doing.
I’ve long wished for an app that would tell you exactly how many polar bears you’re saving with X number of dollars in ESG investments. Unfortunately, ESG statistics and impact reports don’t deal in polar bears.
Measuring ESG’s output of good is tricky. “Good” is not necessarily a concept we all agree on. Plus, to show how a company is doing, ESG uses numerical scores that are not easily deciphered.
Here’s one example: A major energy drink manufacturer had an ESG score of 0. The company massively reduced the amount of forced labor in its supply chain thanks to shareholder interventions, says Andrew Behar, CEO of As You Sow, a nonprofit working to increase corporate environmental and social responsibility.
Reducing forced labor was overwhelmingly better for the brand, and the return on investment outweighed the cost of implementing new practices. Much of the focus of making this change was on improving the company’s ESG score (which went from 0 to 26 out of 100), but the result was a significant reduction in forced labor.
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Greenwashing and ESG
How do you assign a number to positive impact? There are a few ways, such as pounds of carbon prevented from entering the atmosphere, or dollars donated to charity, but even those numbers can be misleading. Those misleading, or sometimes entirely false, claims are called greenwashing.
Many automated financial advisers, or robo-advisers, now offer impact portfolios. Those portfolios are typically made up of exchange-traded funds built along certain themes, such as investing in clean energy. A few say they donate to charities. But several of these funds haven’t donated a dollar.
ESG is a grading system that can be used to combat greenwashing by providing quantitative data. But since the term “ESG” isn’t regulated, that can cause even more confusion.
“We did a report where we noticed that there were 90 mutual funds with ESG in their name, and 60 of them got a D or an F on ESG from us,” says Behar. “So we did an analysis of their prospectuses. The bottom line is that the prospectus language is in no way correlated to the holdings, and no way correlated to the (fund) name.”
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What are your impact dollars doing?
If you’re trying to figure out what the overall good output is from ESG, you may be searching for a long time. Those numbers don’t exist (at least not yet). What does exist are examples of individual companies slowly making change over time.
A single company decreasing the amount of forced labor in its supply chain due to ESG and shareholder advocacy is indisputably good — and that’s not the only example out there.
ESG guidelines, and the people who use them, have led to large-scale reductions in pesticide use, increased sustainability programs and increased diversity within company workforces. Many of those companies also saw increases to their bottom lines alongside the ESG-inspired changes they made. So, yes, ESG does actually create serious, measurable good.
And while you may not be able to get a dollar-to-net-impact metric just yet, that doesn’t mean that ESG isn’t worth investing in. ESG innovations are popping up all the time that help everyday investors make better choices.
Some exchange-traded funds now have a feature that automatically removes companies that fall outside of the bounds of set ESG levels, says Alexandra Mihailescu Cichon, chief commercial officer of RepRisk, an ESG data science company.
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Don’t lose hope
Amid what can feel like trickery and highly targeted marketing, what are well-intentioned investors to do? Keep the faith.
“I think we’re in a stage where we’re in a bit of a transition between the era of commitments and pledges,” Cichon says. “And now we’ve moved on to the next era, which is more about execution of all of these commitments. And then, as part of that execution, that is really about measuring that impact and seeing whether it actually effects the change.”
This era of change has come about because investors have demanded more from the companies they invest in. Despite the greenwashing and politics, the landscape and popularity of ESG investments have changed dramatically. Massive amounts of money have poured into sustainable investments over the last few years.
This, more than anything, has sent a clear message that investors are fed up with business practices that do more harm than good. And the outrage at the lack of transparency surrounding those practices reinforces that investors will continue to hold businesses accountable until they start seeing real change. And maybe even save some polar bears.
