Is ESG BS?

Aug 26, 2023 | Financial

Isn’t ESG Just Greenwashing?

I was listening to one of my favorite podcasts (Breaking Points) the other day, and I heard one of the hosts say that she thinks ESG is greenwashing, in other words, that it’s just some corporate public relations bs. She’s wrong. Here’s why.

It is true that ESG done wrong can be greenwashing. There are fund managers who stick an ESG label on a conventional fund to sell it. At Green, we avoid those funds. How? By doing the research. We look beyond the label. How committed is the fund manager’s firm to ESG – is this their main thing, in which case they may have some real expertise, or is this just one thing they do among many other things, in which case it’s probably just a sales tactic. What is the fund’s sustainability rating? What’s its overall ESG score? Out of the three components of an ESG score, the Environmental, the Social, and the Governance, what is the sub-score of each? Our focus at Green is on climate change, therefore we prioritize that Environmental score. We don’t ignore the others, however, because they do matter. Social matters because how you treat your employees affects whether talented, high-character, hard-working people want to work at your firm, thereby increasing productivity and innovation. Governance matters because avoiding fines and lawsuits keeps your company’s expenses low. However, our focus is on that Environmental score because climate change is literally a matter of life or death for ourselves and especially for our children. It’s a save-the-world kind of thing. Just look at recent news: wildfires in Canada make it dangerous to breathe in Pennsylvania; wet-bulb temperatures get so high in parts of the world that just being outside can cook you. This is no time for business as usual.

We also look at impact. ESG done right has a positive impact on the world, in a few ways.

One, it shifts the Overton window for corporate managers. As money flows into companies that have high ESG scores and away from others that have low scores, share prices go up or down. Share price is tied to corporate manager compensation. They have stock options, and they get bonuses when their company’s share price goes up. So now they’re incentivized to improve the environmental, social and governance behavior of their companies to drive up their stock prices. And they’re incentivized to keep those scores up, to take the long view, because they are reminded over and over that significant numbers of investors, with significant assets, care. This means that real accountability is baked in. And then also, we pick fund managers who are committed to shareholder engagement. They often manage hundreds of millions or billions of dollars, which means they own significant amounts of the companies in which they invest. Money talks. They push the boards of their portfolio companies to become more sustainable and they often get results.

Two, our alternatives sleeves have direct, measurable impacts via our private sector investments. For example, we can quantify how much less carbon dioxide went into the air because we financed a sustainable housing development in a walkable neighborhood in the city and now the people who live there don’t have to drive to work from the suburbs.

Three, Green is a public benefit corporation. That allows us to do more than just maximize shareholder profit in the short-term. We’re able to do things for the greater good, and one thing we do is we donate 1% of our gross revenue – before expenses, not after – to charities that are doing good work in solving the climate change problem. Evergreen Action, for example – we donated money to them, and they use that money to push policy makers at the local, state, and national levels to help create a thriving clean energy economy that works for everyone, not just oil and gas fat cats.

Most importantly, we look at performance. At its core, to us, ESG investing is just another tool to make good investments, investments that perform at least as well, if not, hopefully, better than their conventional equivalents. If you minimize extreme weather risks and stranded asset risks, if you attract the best employees because you treat them with respect, if you save money by avoiding fines and lawsuits – if do that in addition to all the other things that make for a well-run business – then you should make more money, over the long term. And we want to own a share of your company and share in your success. It’s just smart business. So, we look for fund managers that are good at finding those companies – as evidenced by a long-term track record of outperforming their benchmarks. They exist, we know who they are, and that’s who we invest with, with our own money and with our client’s money.

So, there you go. To make smart ESG investments, avoid greenwashing, shift the sense of what’s possible; drive up the stock price of outperformers via capital flow; make intelligent alternative investments that have a measurable positive impact; make charitable contributions that matter; and, most of all, invest alongside skilled managers with excellent track records. That’s how we do ESG. And that’s not bs.