Who Benefits? The Real Impact of ESG Investing
“ESG investment practices favour stakeholder capitalism over shareholder capitalism, which erodes companies’ conventional corporate governance structures. It turns companies into political actors.”
In this paper, Sinclair Davidson and Scott Hargreaves evaluate the rise of ESG investing, its effectiveness, and the problems it poses to the Western financial world.
Summary of Research Paper
The financial sector has made a clarion call for investments in environmental and social sustainability. Businesses have therefore moved away from purely profit-driven motives towards generating wealth alongside producing social benefits.
However, ESG investing is beginning to fall out of favour, not least due to the internal incoherence at the heart of its approach. Concerns are growing that ESG funds do not support the sustainable causes they purport to promote, increase the potential for conflicts of interest, and yield lower financial returns for higher management fees.
These concerns give rise to several questions: Are businesses trading the pursuit of profit for the promotion of political causes? What is the role of corporations in the modern economy? Should stakeholder capitalism or shareholder investment have priority? And does ESG actually achieve its stated aims?
The top six global asset managers hold a combined total of just over $29 trillion—one-quarter of all assets under management. Given this incredibly concentration of wealth, the rise of ESG means that a tiny number of people hold significant sway over what is seen as “ethical” investing.
Furthermore, there is a growing body of evidence that suggests ESG does not fulfil its promises and, in several respects, could actively undermine its stated goals. Areas of concern include:
Lack of standardisation
Incomplete due diligence
Masking unethical practices
Poor financial performance
Possible conflicts of interest
Concentration of economic power
Transfer of democratic accountability
Ethical investing is a personal choice. But investors must be able to make informed decisions. Strengthened scrutiny, transparency, methodology, and accountability will help create a system that finds an appropriate balance between shareholders’ and stakeholders’ interests and empowers companies to contribute to social benefits through the pursuit of profit.