About the author: Fred Krupp is the president of the Environmental Defense Fund.
There are thoughtful critics of environmental, social and governance standards for companies and investors—and then there are those trying to score political points. Knowing the difference will help investors and businesses refine ESG, build stronger companies, and create a more stable future.
Fair-minded analysts, including some who have been leaders in the responsible investing space, raise legitimate shortcomings about current ESG practices. They point out that the data provided by companies often doesn’t give investors and ratings agencies enough reliable information. That makes it difficult to judge companies’ performance. They also rightly push for companies to go beyond announcing goals and instead provide clear action steps for achieving them.
As with any fast-growing area, ESG has created both challenges and opportunities, and US financial regulators are working in real time to respond. The Securities and Exchange Commission, for example, has introduced a proposal to ensure that funds marketed as ESG-aligned explain how they incorporate those factors into stock selection. That would be a good step forward.
The political critiques, on the other hand, are aimed at sparking outrage, rallying voters and attracting clicks on social media. These attacks come from politicians and cable news commentators who denounce the common-sense idea that companies should adapt to a changing environment and meet employee and customer expectations.
The claims by these critics that environmental standards are tyrannical principles of “wokeness” or are similar to Chinese government controls are silly. And the argument that ESG is undermining energy production is contradicted by the realities of the market. Many investors remain unconvinced that major new investment in exploration and production is profitable because of the poor returns they experienced over the past 15 years.
That ESG standards have been so widely adopted that reflects high demand. Put simply, customers, investors and employees want them. Investors and asset owners—everyone from retired teachers and state workers to individual retirement savers—want to put their money in businesses whose values align with theirs. Forward-looking firms address environmental factors because they affect long-term performance and profitability.
Business leaders also know that investments in clean technologies are necessary to keep pace and maintain leadership in the marketplace. That’s why Maersk, one of the world’s biggest maritime shipping companies, is investing in new, low-emission vessels to meet customer and regulatory demand. Walmart has brought together more than 4,000 of its suppliers to set climate goals through Project Gigaton, with the target of reducing emissions by one billion metric tons of greenhouse gases by 2030. And clean energy and related businesses attract millions of investor dollars from those who see huge long-term growth potential. They expect markets to recognize these investments over time.
A growing share of the finance industry is focused on the very real risks to business operations from climate change. At its core, sustainable investing is about using information to make the best possible decisions about the future. That future now includes the significant financial risks posed by destabilizing climate impacts.
Many of the most successful companies and investors have adopted environmental standards for their operations. While these standards are not perfect, their adoption has pushed companies to do better and can improve their financial performance.
The bottom line is that businesses that listen to their shareholders and stakeholders on the urgency of climate change, monitor and measure their impacts, and carry through on their commitments are well positioned for the complexities of the road ahead.
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