Are ESG investors getting the most impact for their buck? That’s the question posed by a growing chorus of ESG critics, who argue that an unregulated ratings system is misleading — to the point that, as one headline reads, “The World May Be Better Off Without ESG Investing.” JTC’s Reid Thomas argues for a better way forward.
Though claims that ESG investing is bad for the earth might be hyperbolic, the related concerns are not. How is it, for instance, that corporations like Phillip Morris and Chevron receive such high ESG scores? Or that Vanguard’s ESG U.S. Stock ETF is .9974 correlated with the S&P 500? ESG has clearly lost its way.
In large part, this stems from the fact that most ESG ratings calculate the “degree to which a company’s economic value is at risk due to ESG factors” rather than their actual impact. What’s more, since E, S and G scores are often aggregated into a composite in a non-standardized way, organizations that many believe do great harm can still receive a high rating. That’s why Phillip Morris’s commitment to a “smoke-free future” can get it on the Dow Jones Sustainability Indices, or why global soft drink manufacturers are among the largest holdings in ESG funds.
The solution is, at least on its face, simple: to measure not merely ESG inputs or…
