It seems as though calls for global action to reign in these sorts of investments have fallen on dull ears. While some banks are scaling back, others are ramping up proving increased accountably is not doing the trick — at least not fast enough.
On their website, Earth Day suggests that companies who have robust Environment Social Governance (ESG) standards also enjoy better profitability, stronger financials, happier employees, and more resilient stock performance. And this is precisely because ESG is built to measure these factors, thus it is unsurprising that these measures do not translate into impact on the planet and society.
Furthermore, these ESG standards have additional limitations and, while there has been good progress in data disclosure standards (many rulings now dictate transparency requirements on climate-related factors like emissions, see CDP.net for more info on that), the data outputs are often focused on how the climate will impact the company, rather than the other way around.
Secondly, ESG data is built around the data that comes from the companies themselves (which can also be problematic and out of date by the time it reaches investors). Many of the traditional approaches to ESG focus on a company's practices and promises which allows them to make claims or goals that give them positive scores without any follow-through.
By allowing a company to use ESG as a tool to demonstrate how sustainable they are (hello greenwashing
), sadly this approach too often ignores the core data, the end game, and the actual impact
of said company. In fact, the outputs are more focused on the risks
that the climate poses to the company. This becomes more troublesome when we know that this data and these ESG scores are used by financial institutes, asset managers, pension funds, etc. to make decisions about who to invest in. Simply put, ESG ratings indicate to these institutes how well a company is managing its risks versus its peers and not what impact they actually have on the world
, and that is a big problem.