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The Origins and Future of ESG and the Concept of “Doing Well by Doing Good”

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A Discussion with Dr. Aswath Damodaran of NYU Stern School of Business School on the Origins and Future of ESG and the Concept of “Doing Well by Doing Good”

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ESG as concept has been around a lot longer than the 2004 United Nations document that many cite as its origin. ESG’s current form has had a meteoric rise in mainstream policy discussions, attributable to good marketing, its weighted investment in technology stocks that were overperforming, and the exclusion of energy stocks which were underperforming the market. Unfortunately, the ESG market has not maintained this dominance, calling into question whether one could “do well by doing good.” According to Professor Damodaran there is little evidence to support this often-stated strategy. If it is true that one could, he argues, you wouldn’t need to carve out a space for ESG; it would show up in the numbers.

That said, impact investing and addressing climate change are both good and necessary. Provided of course, that one is honest with investors that the constraints of ESG on investing strategies will ultimately result in lower returns over the long term. Further, impact investing must be accounted for all the way through the intended impact. Unfortunately, what often happens is the impact affects one company but if the action targeted was a profitable product or service, there will always be another company there to step in and fill the vacuum. Further, these companies that step in are sometimes far less scrupulous than the originally targeted company. Therefore, it is important to remember that ESG is good for some companies, neutral for others, and will end up hurting the rest because of the constraints placed on them by ESG.

ESG under its current form is too subjective. If it is to survive, it needs to be broken up into its individual parts. The “E” should focus on climate and other environmental issues with simple to understand disclosure metrics. The “S” should be removed entirely from the disclosure because not only is it subjective to determine what “good” is, but it is divisive because 50% of the country or more disagree on social issues. Lastly, the “G” should be returned to a discussion between management and shareholders acknowledging the importance of stakeholders.

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