The abbreviation ‘ESG’ stands for “environmental, social, and governance.” ‘ESG investing’ is a strategy that some investors have started using to filter potential stocks through environmental, social, and governance considerations.
ESG investing is an approach that looks past short-term gains to sustainable future prospects. It brings in considerations outside the traditional, purely financial measures in investment analysis. The environmental aspect reviews a company’s green actions — like fighting climate change or saving resources. Socially, it checks how a company supports its employees, culture, and the affected communities. Governance looks at how companies are run, ensuring fair pay and protecting shareholder rights.
Independent rating providers also score companies on how well their portfolios align with ESG values. The number may influence investors on where to put their money.
Those in favour of ESG argue this strategy is not simply about feeling good — it’s about stable returns and more sustainable investments. They think this approach can spot business sustainability risks that typical financial analyses might overlook. Others vehemently disagree with the idea of using ESG investing for a surprising variety of reasons.
How does U of T score?
A press release from the Rotman School of Management declared that Rotman’s mission is to shape the discourse and drive progress in sustainable finance across all business pillars — from individual firms to global markets. Examples of its work include Rotman Professor Sarah Kaplan’s framework for navigating corporate decisions through stakeholder interests, helping to forefront considerations like environmental impact in corporations’ actions.
Beyond thought leadership, U of T has made headlines in the past few years for its divestment action. Victoria University, a U of T federation member, recently sold a property in Saskatchewan, home to an active oil well. The Presidents of Victoria, Trinity, and St. Michael’s Colleges have committed to divesting from fossil fuels by 2030, aligning with the broader university’s sustainability goals.
Yet, these announcements have met critical eyes from students, such as Climate Justice UofT members, who demand more transparency and continue to demand that the administration ensure that the profits from such sales fund future sustainability efforts.
Investors are increasingly recognizing ESG factors as integral to risk management. ESG assets are on a path to exceed $53 trillion globally by 2025.
Considering the risks related to climate change is a prime example of this risk management model — investors must contend with the physical implications of climate change and regulatory shifts in response to the climate crisis that can affect a company’s bottom line. For example, the EU’s Sustainable Finance Disclosure Regulation (SFDR) was founded to encourage funding toward more sustainable investments, and has the power to impose compliance costs on companies. Considering the effects of climate change when choosing how to invest money may benefit an investor’s return.
Academic institutions like McGill University are pushing these efforts, advocating for transformative government and corporate reforms that enhance sustainability and economic growth. McGill’s CIBC Office of Sustainable Finance has proposed amendments to the Canadian Income Tax Act to bolster ESG-focused corporations and to develop special tax statuses for organizations adhering to ESG standards.
The US Securities and Exchange Commission — an independent federal agency for preventing market manipulation — is currently refining its rules to target greenwashing in investment funds and enhance the disclosure requirements for ESG investing strategies.
Is ESG investment greenwashing?
One Forbes article cast doubt on the true aims of some ESG funds, explaining that it can often be greenwashing — a chance for businesses to seem eco-friendly without making a real impact. Greenwashing may offer false comfort while inadvertently distracting the public from more effective environmental actions a company could be taking.
According to a writer in the Financial Times, the ESG scores of various investing portfolios are arbitrary. Rating agencies use a variety of methodologies to score companies’ investing portfolios, from corporate disclosures to third-party reports, to determine their ESG score.
This article discusses the debate about whether ESG strategies conflict with the fundamental investor objective of maximizing returns, potentially breaching fiduciary duties when investment firms manage investors’ investments. Similarly, it describes the argument that asset managers waving the ESG flag may prioritize ideology over profitability objectives, contradicting their job’s inherent purpose.
Paradoxically, it argues that divesting from poor-ranking ESG firms, such as those in the oil industry, may backfire. The argument says that without the capital to invest in transitioning to greener practices, these firms might resort to corner-cutting measures that could exacerbate environmental damage. Proponents of this argument say the challenge in creating greener investing lies in figuring out how to assist high-emitting firms in the shift toward sustainability rather than excluding them from access to funding.
Whether you are for or against using ESG scores and investing strategies, the evidence seems clear that they are not a magical cure for climate change and social equity.