Why Resisting ESG is the Key to Achieving Sustainable Success: A Better Alternative

Resist ESG.

ESG stands for Environmental, Social, and Governance, a set of criteria that some investors use to evaluate companies. But I’m here to tell you that ESG is a trap that can distract you from your primary goal as a board member.

Now, let’s cut straight to the chase: The primary responsibility of a board of directors is to act in the best interests of the company’s shareholders.

Let me be clear: I’m not saying that environmental and social issues aren’t important. Of course, they are. But as a board member, your responsibility is not to save the world. That’s not what they hired you to do. And if you get too caught up in ESG, you can lose sight of that goal.

ESG ratings offered by firms like MSCI and Sustainalytics are not necessarily related to actual corporate responsibility regarding environmental, social, and governance factors. Instead, they measure the degree to which a company’s economic value is at risk due to ESG factors. This means that a company with pollutive behavior could still receive a decent ESG score if the ratings firm believes the behavior is being managed well or is not threatening the company’s financial value.

This could explain why companies like Exxon and BP, which pose major environmental threats, receive average scores from MSCI. Additionally, companies like Phillip Morris, which commit to reducing regulatory risk by transitioning to “smoke-free” products, may receive high scores despite the continued harm caused by their products.

Rating firms assign weights to each ESG factor and aggregate the results into a composite ESG score used to construct portfolios for ESG indexes and funds. However, this approach is subject to human judgment and inconsistent access to ESG information, leading to significant variability across raters. Additionally, companies can achieve high composite scores even if they cause substantial harm to one or more stakeholders as long as they perform well on all other parameters.

The reliability and effectiveness of ESG ratings for investment purposes are called into question by a joint study by professors from the London School of Economics and Columbia Business School, which found that high ESG ratings are not associated with substantial investment holdings, and ESG funds are no better than non-ESG funds in terms of returns.

The study also revealed that ESG funds have violated more labor and environmental laws than non-ESG firms. Researchers compared the ESG record of U.S. companies in 147 ESG fund portfolios and that of U.S. companies in 2,428 non-ESG portfolios. They found that the companies in the ESG portfolios had worse compliance records for both labor and environmental rules. However, they also found that companies added to ESG portfolios needed to improve compliance with labor or environmental regulations subsequently.

ESG Does Not Equal Higher Returns

Another study found no evidence that investing in highly rated ESG firms improves investment returns, and ESG-based investing does not provide additional benefits compared to non-ESG-based investing. Furthermore, ESG funds have violated more labor and environmental laws than non-ESG firms, and ESG ratings are unreliable. Another study compared ESG scores of companies held by signatories to the United Nations Principles of Responsible Investment and those that did not sign. It found that ESG scores did not improve for the former and that their financial returns were lower and risk higher. One reason may be that companies use ESG as a cover for poor business performance. As a result, sustainable fund managers may need to be more invested in financially underperforming companies that publicly embrace ESG principles.

So, why are ESG funds doing badly?

A possible explanation is that an express focus on ESG is redundant. Corporate managers trying to maximize long-term shareholder value should naturally pay attention to the employee, customer, community, and environmental interests in which they operate. In competitive labor and product markets, companies that fail to do so are likely to be at a disadvantage. On this basis, setting ESG targets may distort decision-making by incentivizing companies to prioritize ESG concerns over other factors that are important to the business’s long-term success.

Another issue is that companies may publicly embrace ESG as a cover for poor business performance. For example, research has shown that when managers underperform earnings expectations, they often talk publicly about their focus on ESG. But when they exceed earnings expectations, they make few, if any, public statements related to ESG. This suggests that some companies may use ESG as a marketing tactic to divert attention away from their financial performance.

Moreover, the ESG ratings themselves may not be reliable. For example, many firms receive high environmental and social ratings despite having negative human rights/labor records or having questionable environmental impacts. This means that ESG-based investing may not provide any additional benefits compared to non-ESG-based investing on both the basis of the ESG-graded value or the monetary value of an investment.

Additionally, a recent European Corporate Governance Institute paper found that companies held by U.S. institutional investors that signed the United Nation’s Principles of Responsible Investment (PRI) did not improve their ESG scores after signing and had lower financial returns and higher risk than non-PRI signatories. This suggests that ESG investing may not effectively achieve financial returns and ESG goals.

FTX’s collapse further exposes ESG’s cracks.

The board of directors’ fiduciary duty is to maximize financial returns for shareholders, and too much focus on ESG factors can be a distraction from this duty. FTX’s adoption of “effective altruism” has been criticized as “greenwashing,” and even the founder of FTX has questioned the validity of ESG. The collapse of FTX raises questions about the effectiveness of socially responsible investing in adhering to fiduciary duty. Congress should continue to investigate how ESG scores are calculated and ensure that board directors prioritize financial returns for shareholders.

What Boards Should Do To Resist ESG

So what should you do as a board member? First, you should resist the pressure to focus too much on ESG. Instead, you should focus on what you know best: governing your organization. That means making decisions that are good for the bottom line, even if they don’t always look good on paper. It means investing in the things that will make your products better and more profitable rather than investing in something that will make you look good in the press.

If you want to create long-term value for society and the environment, you gotta step up your game and take action. Stop relying on ESG ratings and start focusing on making a real impact. This means going beyond what’s expected and doing more than just meeting the minimum requirements.

So, let me ask you, what are you doing to make a real impact? Are you just going with the flow, following the latest trends? Or are you ready to take ownership and make a difference in the world?

Don’t let ESG distract you from the fundamental goal of creating long-term value for society and the environment. Of course, that doesn’t mean you should completely ignore ESG. You should still be mindful of your environmental and social impact, and you should make sure that your company is run in a way that is ethical and responsible. But you should never forget that your primary goal is to make money for your shareholders. And if you can do that while also being a good corporate citizen, all the better.

Here are some examples of how corporations can increase long-term value to society and the environment without necessarily adhering to ESG principles:

1. Developing innovative and sustainable products: Corporations can invest in research and development of products that address environmental and social issues while providing economic benefits to the company.
2. Adopting sustainable business practices: Corporations can improve their operational efficiency by adopting sustainable practices such as reducing waste, conserving energy, and managing natural resources.
3. Community engagement: Corporations can support the local community by engaging in charitable activities, donating to social causes, and investing in local projects that promote economic growth.
4. Building a diverse and inclusive workplace: Corporations can foster an inclusive work environment that values diversity and promotes gender, racial, and other forms of equality. This can help attract and retain talented employees and improve the company’s public image.
5. Transparency and accountability: Corporations can adopt transparent reporting practices that help to build trust with stakeholders and enable them to make informed decisions. This can include regular reporting on the company’s environmental and social impact and financial performance.

A Better Way to Make An Impact

Instead of focusing on environmental, social, and governance factors, we should focus on good governance. And if you’re looking to improve your company’s governance, you need to check out Board Director.

Let’s be honest: good governance is more crucial for a company’s success. When your company is run well, it’s more profitable, more efficient, and better able to weather any storms that come its way. And that’s where Board Director comes in. With Board Director, you get a powerful tool that makes it easy to keep your board of directors in line and up-to-date on all the latest company news. You can share files, communicate securely, and streamline your meetings all in one place.

So why focus on good governance instead of ESG? Well, for starters, good governance is something that benefits everyone. When your company is run well, it’s not just good for your shareholders or your customers; it’s good for your employees, your suppliers, and your community as a whole. And unlike ESG, good governance isn’t just a box you can check off and forget about. It’s an ongoing process that requires constant attention and improvement.

I highly recommend checking out Board Director. With this powerful tool in your corner, you can rest assured that your board is always up-to-date and aligned with your company’s goals. So forget about ESG and focus on what matters: good governance.

ESG TRAP: The Conclusion

ESG is a trap that can distract you from your primary goal as a board member: act in the best interests of the company’s shareholders. The conclusion drawn from this presented evidence is clear: adopting ESG principles may result in lower financial returns with little or no actual contribution towards advancing ESG interests. Therefore, while you should still be mindful of your environmental and social impact, you should always prioritize the bottom line. So resist the pressure to focus too much on ESG and focus on what you know best: making money. After all, that’s why you were hired in the first place.