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Overview
ESG is one of the most contentious modern-day topics. Whether you look at investment reports, political debates, or even Elon Musk’s Twitter, you see it popping up nearly everywhere. But what is ESG, and why has is surged in relevance in recent years? Is ESG really the future, or is it just a fad?
What is ESG?
ESG—or environmental social governance—is a metric to measure how socially responsible a company. To do this, rating agencies measure relevant subcategories across these three dimensions. Examples include pollution, diversity, energy use, board structures, etc. ESG aims to bridge the disconnect between company goals and actions in contributing to the global sustainability agenda.
Existing Limitations
While ESG sounds great in theory, there are many issues with it in practice that hinder adoption. This is largely due to a lack of standardization in ESG evaluation. Since ESG rating agencies use self-reported company filings, it allows some organizations to “greenwash” by portraying themselves in an artificially positive light. As such, this leads to inconsistent evaluation because it is hard to determine true corporate social responsibility.
Even amongst different ESG raters (i.e., MSCI, S&P Global, Sustainalytics), there is heavy disagreement. For example, according to an MIT study, the average correlation among the 6 most prominent rating agencies is only 0.54. This pales in comparison to financial ratings, which have a correlation of 0.99.
These fundamental challenges have made ESG a topic of contention, forming a strong “anti-ESG” movement. Many politicians feel ESG gives certain agencies/people excessive power to control financial markets through these ratings, limiting free-market individualism. As such, US states and governments have not only been abstaining from ESG, but actively passing legislation barring the consideration of ESG for investments. This hinders any meaningful integration of business sustainability.
Fad or Future?
The current state of ESG appears like a gilded solution to our sustainability challenges. On the surface level, it appears to sufficiently address any issues of corporate social responsibility; however, after digging deeper, one can see layers of issues preventing effective implementation. This begs the question, is ESG the future, or is it just a fad?
We believe that ESG is here to stick. With climate change and social issues prevalent in society, we need a solution to ensure long-term economic sustainability. Furthermore, according to a wealth of literature, failure to adopt sustainable, long-term ESG practices hurts the bottom line—which has always been relevant. This is corroborated by a study done from the Wharton school, where they found anti-ESG bills limiting sustainable investment cost taxpayers between $300 and $530 million over six months—hurting both the planet and profits. Rather than remove ESG, we believe it must be refined. We need to make a qualitative process more quantitative.
This is our goal at ESG Glass. By leveraging a wealth of available data, we hope to further quantify ESG to provide greater guidance for executives, investors, and consumers. We hope this can usher in a tech-driven paradigm of sustainable finance that will lead to the seamless integration of ESG.