The concept of ESG (Environmental, Social, and Governance) has become increasingly widespread among companies, investors, politicians, and officials, who view it as a positive step towards sustainability.
However, ESG is a diverse entity that offers ample opportunities for greenwashing, and it is ambiguous whether the motivation behind its originality was purely benevolent or profit-driven.
Goldman Sachs and other major financial houses invented the term ESG in 2004 in a report to the then UN Secretary-General, Kofi Annan.
Whereas there is nothing inherently wrong with this, it is worth considering the motivations behind their actions. Goldman Sachs has a history of profitably launching ideas such as the BRIC countries, which later proved intricate for investors and companies alike.
The competition in international asset management has also contributed to the rise of ESG.
Low-cost index funds have put pressure on traditional asset management, prompting companies to create new products with less transparency, less competition, higher fees, and better earnings.
ESG fits this description perfectly, as it is a vague concept that no one truly understands, and there are many different ratings that do not agree.
The world’s largest asset manager, Blackrock, promotes ESG investments, as they earn significantly more from these funds than from regular investment products.
While Blackrock claims that their ESG commitment is not charity, but pure capitalism, this raises questions about the sustainability of ESG investments.
Studies have shown that companies with higher ESG ratings emit more CO2, which contradicts the perception that ESG investments are more sustainable.
This confusion provides broad opportunities for greenwashing, which numerous companies and investors take advantage of to market themselves as environmentally friendly without taking real action.
To address these issues, knowledgeable professors and the chairman of the SEC, U.S. Securities and Exchange Commission, have criticized ESG, and it is time for the financial sector to come up with a better solution.
One approach could be to scrap ESG and focus on more objective sustainability goals, such as CO2 emissions, water consumption, average wages, diversity, etc.
This would ensure transparency and credibility in sustainability efforts, rather than leaving the decision to rating companies.
It is evident that ESG is a complex and ambiguous term that has become susceptible to manipulation and greenwashing.
The lack of a standard framework and objective measures for evaluating ESG practices has created confusion and led to inconsistent ratings.
To overcome these challenges, it is imperative to introduce objective measures that can help in restoring credibility and ensuring transparency in sustainability efforts.
This will help in identifying the true sustainability performance of companies and investments, thus enabling stakeholders to make informed decisions.
It is only by adopting a rigorous and transparent approach to sustainability that we can hope to build a more sustainable future.