The case against ESG

Environmental, Social, and Governance (ESG) refers to a set of socially conscious standards businesses commit themselves to. ESG has often been treated like the Brussel Sprouts of the corporate world. Nobody really likes it, but if you’re a good boy/girl you’ll eat it without a fuss because it’s green and supposedly good for you.

There’s a problem though. When you’re a kid, your parents can force you to eat your greens but once you become a teenager you start pushing back. That’s what’s happened with ESG in the corporate world.

Like most ideas, ESG started with the best of intentions. It’s good for you they said. It’ll help the planet they said. It could change the world they said. Investors took one look at the green stuff and understood they had no choice - they had to like it.

Nearly 20 years after ESG first became a thing in the corporate world, it’s coming under fire. Companies like Tesla, who we might imagine do well in these ratings, are being pushed out of ESG indices (trackers that watch out for companies following these standards) while their peers, arguably far worse for the environment stick around.

The reason for this is confusing, but simple.

These ESG indices give more weight to future improvements than current performance. I don’t wanna say this is dumb, but imagine if the Olympics gave gold medals to the “most improved”. Good for those folk, but if I’m Usain Bolt I’d be pretty pissed. Understandably, the Usain Bolts of the ESG world have been crying foul play for a while now - and people are starting to take notice.

Especially in the US, it’s started to come to a head - high-profile Republican politicians such as Ron DeSantis (Governor of Florida) are going to war against what they call “Woke Capitalism”, putting ESG under the microscope. It might just sound like a talking point but there’s an interesting underlying critique.

We’re dealing with what happens when two facts meet - at the same time it’s true that:

• ESG has been “gamed” by plenty of companies

• ESG has also pushed plenty of companies into actions to reduce their environmental impact that they otherwise wouldn’t have taken

While it sucks that Usain Bolt doesn’t get his gold medal, the fact that everyone else improved is still a net good for those in the (human) race.