Are ESG investors really helping the environment? A recent podcast by Freakonomics takes a critical look at what ESG investing means in practice and engages some academics and practitioners who are actively questioning its value. Here we summarise the key points of the podcast.
ESG investing has gained massive popularity in recent years. Its principal idea is to invest in companies that are not only profitable but also doing positive things for the world. However, while this sounds great in principle, economist Kelly Shue has a number of issues with this approach.
She argues that ESG investors might be missing the mark when it comes to making a real positive impact on the environment. The problem for her lies in how ESG investors decide where to put their money. Instead of seeking out companies needing to change their polluting ways, ESG investors often end up investing in firms that are already ‘green’. So, while these companies get more investment for their green credentials, the real polluters are left behind.
Instead, Shue presents an alternative approach. She argues that investors should consider more than just ESG ratings. Things like regulations and innovations can play a massive role in encouraging companies to be greener. Thus, by supporting stricter rules and regulations, and investing in innovative solutions, can make the real, tangible changes required by companies across our global economies.
Furthermore, by running away from “brown” firms when we can – and should – be helping them to turn green, is not beneficial. Shue believes that engaging with these companies and encouraging them to be more eco-friendly is the way to go. And this can only be achieved by putting financial pressure on them.
In short, investors must take a broader approach to helping the environment. While ESG investing has its part to play, it shouldn’t be the only investment strategy. ESG investors should actively support companies that are serious about becoming green, not just being green. This requires an approach that provides financial perks for doing the right thing, thereby driving change and making our planet a better place.
Kelly Shue’s research reminds us that we need a more comprehensive approach. Support better regulations, invest in green innovation, engage with companies needing to change, and reward those companies that genuinely care (and deliver) about the environment.