The Handbook of Board Governance, 3rd Edition

19ESG’S Growing Pains

Nell Minow, BA, JD

Vice Chair, ValueEdge Advisors LLC

Introduction

ESG stands for environmental/social/governance, and ESG investing is the fastest growing sector of investment. Indeed, it has gone from a nice-to-have to a have-to-have, reaching beyond the boundaries of its own sector, and is now reflected in making buy/sell decisions in managed funds not explicitly labeled as ESG-based and in the exercise of proxy voting and other share ownership rights by index funds.

ESG encompasses three enormous and very different categories, and ESG factors are inadequately and inconsistently disclosed and difficult to quantify because the metrics are still evolving and based on inconsistent and unverified disclosures. There is no ESG equivalent of audited financials.

This is reflected in a summer 2022 cover story in the Economist magazine devoted¹ to the failures of ESG. It is worth examining the concerns it raises as a good snapshot of one perspective on the best and worst elements of ESG, real and perceived, 18 years after the term first appeared.

The Economist says that ESG “suffers from three fundamental problems.”

• First, because it lumps together a dizzying array of objectives, it provides no coherent guide for investors and firms to make the trade-offs that are inevitable in any society. Elon Musk of Tesla is a corporate-governance nightmare, but by popularizing electric cars, he is helping tackle climate change. Closing down a coalmining firm is good for ...