We need to be honest about our own research problems if ESG is to deliver.
A year ago the explosion on Deepwater Horizon unleashed the worst environmental disaster in US history. For those who subscribe to the idea that environmental, social and governance (ESG) analysis makes for enhanced risk analysis it was a costly blow. BP had been rated well by many ESG analysts and the stock took a dive after the disaster. For those who also believe that ESG analysis leads to meaningful engagement by responsible investors to improve a firm’s social or environmental performance, the evidence that many investors had asked BP about their poor safety record over the past decade, to little effect, also presented a conundrum. Although the responsible investment community now comprises over $20 trillion in assets under management, overall we are not seeing effective pressure on firms to be more responsible. Instead, we hear CEOs blaming the financial markets for short-termism limiting their investment in CSR, ESG analysts blaming investors for not paying enough for better research, and the SRI heads in financial institutions blaming regulators for not empowering them, or quietly admitting that their efforts are dwarfed by their colleagues’ exuberance for exotic derivatives, dark pools, high frequency trades and other shenanigans that most of us get lost on. Repeating the mantras that ESG analysis is good for returns or good for society wont make them true, just like spraying detergent on oil wont make the toxicity disappear. Instead, the flaws of ESG analysis and ratings need fixing as part of a new attempt to make socially responsible investment funds and self-proclaimed responsible investment institutions deliver more for society and those citizen-savers among us who don’t want our nest-eggs to trash the planet. The Journal of Corporate Citizenship has published an analysis of the flaws of mainstream ESG analysis, some reasons for this situation persisting, and some ideas on how to begin fixing it.
After consultations with dozens of reflective practitioners and academic critics, the study finds that many ESG analysts and raters:
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