When I chose to major in environmental studies, I also chose to one day have a career that would serve the environment. I like to believe this is the case for most students who choose to pursue their passion for the natural world, if not at other institutions, then certainly at Wellesley. As I have passed the halfway mark of my college education and my graduation date becomes more visible, the question of career looms more heavily than ever. As I explored environmental careers this summer: through coffee chats, LinkedIn messages and pointblank google searches, all I saw were jobs relating to Environmental, Social, Governance (ESG).
With the climate crisis having progressed further than we ever hoped it would and pressure being put on corporations from the Securities and Exchange Commission, ESG has become a burgeoning field. The demand for ESG experts is at an all-time high across professional services, especially for finance and investment firms where ESG investing has become one of the hottest trends.
ESG investing as a concept sounds transformative: it is a form of sustainable investing that considers environmental, social and governance factors to judge an investment’s financial returns and its overall impact. These ESG ratings, which are used to make decisions about investments, look at a wide range of factors such as carbon emissions, green energy initiatives, as well as fair labor practices and executive pay.
The idea of corporations being socially responsible was tantalizing enough for me to consider a job in this field or at least investing in an ESG investment fund. It was only when I started researching how these ratings were done, and the nittier mechanics of this practice, that I understood how misleading the marketing was.
At face value, it seems that ESG investing will be devoting more capital to companies that do good, thus creating an incentive for all companies to be more environmentally and socially conscious. However, ESG ratings which underlie the fund selection are based on “single materiality,” which is the impact of the changing world on a company’s profits and losses. Not the reverse. As Bloomberg puts quite clearly, “[ESG] ratings don’t measure a company’s impact on the Earth and society. In fact, they gauge the opposite: the potential impact of the world on the company and its shareholders.”
Last year, McDonald’s received an upgrade in ratings done by the MSCI. It was cited that the company reduced “risks associated with packaging material and waste.” The actions that awarded this rating included the company’s installation of recycling bins at locations in France and the U.K., both of which are countries where they would have potentially faced regulations if they did not recycle. McDonald’s, however, produces 53 million metric tons of carbon per year, a number that has been sharply increasing since 2015. To put that into perspective, the entire country of Norway produced 50.3 million metric tons of carbon last year.
Despite those emissions being a direct cause of climate change, the MSCI did not see them as posing a financial risk for McDonald’s so it did not affect their ability to receive a respectable ESG rating. Appallingly, Exxon and BP are also well regarded by MSCI’s ratings. The takeaway is that as long as environmental issues and the regulations aimed at targeting them pose no threat to a company’s bottom line, ESG ratings deem them irrelevant.
Wall Street greenwashing the economy is a dangerous distraction in the fight against climate change. This new trend being revered as a method of tackling our climate crisis has delayed and displaced urgent action needed. ESG investing sends a worrying message from the financial sector; it essentially is saying that it is okay if the environment falls to ruin because our investments will still be profitable. ESG investing is only a way to measure risks to corporate cash flows, it is not a way to promote planetary sustainability.
While it is not my purpose or frankly my business to dissuade people from a certain career path or an investment choice, I merely hope to kindle our environmental consciousness. It is unfortunate that ESG investing is another product of regular capitalism, something born of perceptive marketing at the service of profits. But, there is a silver lining. ESG investing has created the infrastructure of a practice that could have a legitimate impact if there were robust environmental regulations that pose a financial risk when not adhered by to companies. There is potential for it to be something of substance, as long as we have the proper legislation underpinning it. Reforming corporate America will not be kind to bottom lines, but it is time for the corporations and our government to uphold social responsibility and invest in the future of our planet.
