ESG Investing – Why We Should Be Focusing on Emissions
On paper, ESG (Environmental, Social and Governance investing) is a great idea; it focuses on encouraging organisations to work harder on actively tackling the threat posed by climate change. But it is not all as it seems, as there are more negatives than meets the eye when it comes to ESG.
Environmental, Social and Governance Investing
ESG stands for Environmental, Social and Governance investing, which is an approach created in an attempt to make organisations work towards social goals on behalf of shareholders. This approach was created to encourage businesses to play their part in tackling climate change, rather than being solely focused on profits.
Introduced in 2004, ESG encourages investors and shareholders to evaluate firms based not only on their commercial performance but also on their environmental and social record and governance. With growing concerns on global warming, and the lack of action from local governments, ESG has seen a rise in popularity in the last few years as people turn to companies to solve climate problems.
The Negative Side to ESG
Whilst ESG has good intentions, there is controversy around the approach, with numerous flaws being uncovered. Many organisations are being accused of greenwashing – deceptively using marketing to persuade consumers that an organisation’s products, aims and policies are environmentally friendly – which not only makes for unhappy customers, but also distracts from the vital task of tackling climate change.
Lack of Objectives
Unfortunately, there is no coherent guide for investors on how to execute and measure ESG activity, which inevitably leads to trade-offs taking place. For example, building wind farms is a great way to increase renewable energy and encourage the decrease of coal mining, but how much does this affect local ecology? The same could be said for closing down coal mines – although this forces businesses to look towards renewable energy, where does this leave the local workforce that finds themselves redundant?
In addition to this, there is no easy way to measure changes made by companies and the impact that they have. Whilst organisations may improve ESG scores by carrying out certain activities, there is nothing to say that they couldn’t sell assets to a different owner who will continue running them as they were before – leading to no real improvement for the environment.
Focus on Emissions
Due to these reasons, many are campaigning for ESG to focus more on emissions, rather than the umbrella term of environmental changes. Emissions are one of the biggest factors affecting climate change, and therefore would be a good starting point for organisations to tackle . What’s more, emissions can be easily assessed – allowing consumers to quickly identify who the biggest carbon culprits are. Organisations are then forced to track their carbon footprints and take action to reduce them, helping to make a difference to the climate. By reducing carbon emissions, we help ensure clean air, water and food for the world and for future generations.
Consumers’ wants and needs are changing, they are willing to pay more financially to choose cleaner firms, and with tighter regulations on the horizon, it is worth organisations making positive changes now and adapting their business models.