The fundamental contradiction of ESG is being laid bare

Can profit-seeking companies really help save the planet? The question has long dogged the practice of environmental, social and governance (esg) investing. Judging by the giddy growth in all things esg, you might have thought the answer to it must be Yes. More than $35trn of assets worldwide are said to be monitored using some sort of sustainability lens, an increase of 55% since 2016. Investors, banks and businesses have signed up to a series of alliances, from the gfanz and the gsia to the pri and the iigcc, pledging to bring down their own carbon emissions and those of their portfolios. And bosses of s&p 500 companies now mention esg nine times a quarter in earnings calls, on average, compared with just once, if at all, in 2017.

But as the focus shifts from words to deeds, the contradictions in esg are becoming brutally clear. It is the mission of companies to generate long-term value for their investors. That might sometimes align with the aim of decarbonisation. Unfortunately, it will often be more profitable for a business to dump costs, such as pollution, on to society than to bear them directly. And in places without a consensus on climate policy, getting involved in greenery can bring clashes with both regulators and investors. Unless governments resolve the dilemma, esg is doomed to fall short on actions.

One illustration of the tensions in esg is the political firestorm in America around BlackRock, a huge asset manager . Republican attorneys-general in 19 states accuse it of misusing its market power by boycotting fossil-fuel firms. The company rejects the charge. Meanwhile, watchdogs in New York, a Democratic state, complain that BlackRock is not green enough. The controversy could come at a cost to the business: Texas, a Republican state, plans to ban its pension funds from dealing with the firm.

No wonder that some financial institutions are getting cold feet about green alliances. JPMorgan Chase and Morgan Stanley were among the Wall Street giants threatening to quit a subgroup of the Glasgow Financial Alliance for Net Zero (gfanz), a coalition co-chaired by Mark Carney, a former governor of the Bank of England. Standards for members were subsequently changed. Two pension funds, Australia’s Cbus Super and Austria’s Bundespensionkasse, have already left.

Critics offer lots of reasons for the jitters. Membership of gfanz, which includes firms overseeing $130trn in assets, has been touted by some as evidence of anti-competitive behaviour. Other questions swirl. Can pledges be made without investors’ approval? Would missed pledges put firms on the hook for legal action? And why comply with onerous rules if you don’t have to?

Firms, too, are discovering that speaking out has repercussions. In 2019 the Business Roundtable, a group of corporate bigwigs, said that the objective of a company should be to benefit its stakeholders. Jamie Dimon, the boss of JPMorgan Chase who was then the group’s chairman, has now taken to denying that he is “woke”. Unilever, a consumer-goods firm, has cast itself as a sustainability icon, but its shareholder returns have lagged far behind those of its rival, Nestlé. On September 26th Unilever’s boss, in only his fourth year in the job, announced plans to step down.

The esg dream was that capital markets would penalise those firms that ignored the looming costs of climate change on their businesses. But in practice the costs are too uncertain and distant to play a big part in firms’ or investors’ financial calculus. Most companies can win the gains of appearing green while avoiding the cost of decarbonising by paying lip-service to green goals. According to Climate Action 100+, a group of investors, more than two-thirds of the world’s 166 biggest greenhouse-gas emitters have promised to reach net zero by 2050 or sooner. But less than a fifth have medium-term targets; a similarly low share have set out quantified decarbonisation strategies.

No shortcuts

It falls to governments to reconcile the goals of profit maximisation and a safer climate. The best way of doing this is to set a high enough price on carbon, forcing companies to internalise the costs of their dirty activities, so that going green is also good for the bottom line. Mandated standards and disclosures must be brought in more quickly, to help firms assess their exposure to higher carbon prices. Companies can help save the planet—but only if doing so is good for business. ■

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