What is ESG And Is It Needed?

What is ESG, And Is It Needed?

– By Lisa Rutherford –

Environmental, social, and governance—ESG—is a term that’s been in the news for several years but is getting more attention. In April of this year, the State of Utah griped to the S&P Global Ratings about an ESG rating given to Utah. S&P Global Ratings had published ESG credit indicators as part of their credit ratings for states and state subdivisions, and Utah demanded that be stopped. Utah asserted that the “newfound focus on ESG” was politicizing the rating process, a process on which the state and others rely heavily for obtaining funding. A credit rating is similar to a credit score for individuals.

Why was Utah given a 3 on a scale of 1 to 5? S&P cited water challenges as Utah grows stating “environmental factors are a moderately negative consideration in our credit rating analysis for Utah.” Population growth and droughts caused by climate change were cited specifically. But is this really political, as Utah asserted, or is it being realistic? For those of us who have lived in Utah and witnessed the growth and water issues, it seems a breath of fresh air to have someone other than us concerned about it.

We first need to understand what ESG is. Basically, it’s a way for investors to evaluate an investment in terms of how that entity performs based on environmental, social, and governance factors. States are not the only entities ranked on ESG criteria. Corporations, funds, banks, insurance companies, to name a few, are also ranked. It allows—or ‘should’ allow—investors to evaluate the extent to which a corporation or other entity works on behalf of environmental, social and governance goals.  ESG goes beyond the role of a corporation to maximize profits on behalf of shareholders.

The term was first used in 2004 by the United Nations as a global movement, and in less than twenty years the movement has grown. Capital totaling $17.67 billion (U.S.) flowed into ESG-linked products in 2019 according to Morningstar, an influential financial research organization. ESG products, although focused on lofty goals, are not without their critics. But a March 2019 Economist article reveals that “Asset managers think that investing with an eye on environmental, social and governance issues is no longer just a fad.”

Blackrock, an asset manager, supported Morningstar’s assessment by revealing that companies “with a greater ESG emphasis have high-quality and low-volatility characteristics.” Blackrock’s boss, Larry Fink, has asserted that corporation should “pursue a purpose as well as, or beyond, simple profits.”

Milton Friedman, an economist and considered by some as the paragon of “free market” economics, wrote in 1962 that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits” but he did call on companies not just to stay within the law but to honor society’s more general ethical standards, too, meaning that short-term profitability should not be their only focus. So, this is not, as Utah asserts, just a “politically driven” issue.

What’s behind this movement? It’s not just shareholders, who generally focus on profits, who are now concerned with problems that our nation and world face and which are not being solved by governments due to political gridlock. As an investor myself, I also feel there should be more value from my investments than just dollars. Young workers that businesses want to employ want to work in places that reflect their values much more than their parents’ generation did. They’ve seen too much corporate money flowing into entities they believe will not make this world a better place to live.

The problem is that ESG has not panned out to be what was originally envisioned. Some firms and corporations have been accused of “greenwashing” by deceiving clients who believe that ESG concerns are being addressed when, in fact, they are not. Some feel that ESG has been a cash cow for those who are pushing a confusing system. The gridlock we see in our political system is forcing people to look elsewhere to solve some of our thorniest problems, but ESG seems to be fostering some delusion that business can profit and exhibit good behavior, too, without some pulling shenanigans to hide behind ESG.

Perhaps the real problem is that ESG has spread itself too thinly. Expecting entities to factor in environmental, social and governance criteria—all very complex issues—into a convenient package seems to ask too much.

Perhaps a more focused approach as advised by the Economist in their July 2022 article would be the better approach: ESG should be “unbundled.” It should be boiled down to just measuring carbon emissions since even “environment” is an all-encompassing term. Social and governance are important, too, but with the headaches being created trying to consider all aspects of ESG, we have to go after what’s most important at this point: CO2 emissions creating climate change that is wreaking havoc around us. Making businesses and other entities, including states like Utah, account for their carbon emissions should make this easier and clearer.

With the majority of us dealing with the effects of climate change in one way or another, a growing number of altruistic consumers and investor may be willing to have it cost them financially to favor clean firms if it means it may help control the carbon problem. Government action, too, is required to deal with this, but given the gridlock we have politically at least this would put pressure on an otherwise intractable system.

For too long we have been feeding the fossil fuel monster that has basically locked us into a system that has created a plethora of problems for us. We are witnessing the effects of climate change directly related to fossil fuel use, and it’s costing all of us dearly one way or another. If we are not in the midst of fires, storms, and rising sea levels ourselves, we are paying for them through increased insurance premiums and government costs to deal with them. For too long corporations and others, including states that seek funding for potentially carbon-producing projects, have managed to get away with doing business that passes along these costs to citizens. And for too long we have played into the hands of “petrodictators” who control fossil fuels on which we rely too much. The call for more domestic fossil fuel development is not the answer. It’s just part of the same old game. As a retired oil/gas employee I’ve seen this for too long.

So, back to Utah and their complaint about their S&P ESG rating. Would it help Utah if S&P rated Utah only on environmental criteria specific to “carbon emissions”? Perhaps. But with Utah’s love of coal, oil and natural gas—all which result in significant emissions—probably not. Utah has counted on S&P for stellar ratings for a long time. Utah’s April letter questioned S&P’s ESG ratings done on others, too, and noted S&P’s at-times-poor rating history. But demeaning the agency upon which Utah depends is probably not the smartest move. I believe ESG—or perhaps just “E”—is here to stay and Utah must adapt. This is not a political move by S&P and others; it’s been building momentum for nearly twenty years, through both Republican and Democratic administrations. A move to be more honest about what entities such as corporations and states do that are contributing to our world’s problems is long overdue. These problems have been growing for decades.

Viewpoints and perspectives expressed throughout The Independent are those of the individual contributors. They do not necessarily reflect those held by the staff of The Independent or our advertising sponsors. Your comments, rebuttals, and contributions are welcome in accordance with our Terms of Service. Please be respectful and abide by our Community Rules. If you have privacy concerns you can view our Privacy Policy here. Thank you! 

Click here to submit an article, guest opinion piece, or a Letter to the Editor