December 9, 2023

By -

Jamie Green

This article examines some areas of ESG investing that aren’t covered in the glowingly positive or venomously negative pieces that make up so much of the coverage we regularly see.

It seems safe to say that ESG is neither as good as some say nor as bad as others would have you believe. The most important factor is that you are familiar with the details so that you can clearly articulate them and not end up holding an investment that is quite different to the one you thought you had.

There is much to unpack when it comes to the debate on ESG investing. Simplistically, many of the most aggressive advocates and detractors are presenting arguments that may sound appealing in the echo chamber, but don’t deliver any compelling evidence once you scratch the surface.

One of the real ethical quandaries of ESG investment styles/products is being satisfied that you have the complete picture. There is ample data showing how much money is flowing into ESG investment, but popularity is not the goal and it may prove to be a difficult conversation since the words ‘environmental, social, and governance’ likely tick a lot of boxes for people who would prefer to invest with a belief that they are supporting better outcomes.
The nature of ESG means that it is necessary to raise issues that may seem to have some form of political agenda attached to them. The role of investors, companies, government and institutions are intertwined but need to be analysed coldly. However, the one thing that the evidence makes abundantly clear is that the success of ESG (i.e., actual environmental, social and governance improvements) will only be delivered with co-operation from all of these parties – and is doomed to fail if it is hoped that they can succeed in isolation.


ESG investing will outperform conventional investing – It shouldn’t but it could. 

First the ‘shouldn’t’ part. At the most superficial level, investing in a way that avoids companies that have low ESG scores is an exercise in risk management and not a means of directly advocating for change of corporate behaviour.

The returns on growth assets like property and shares are expected to be better than those generated on defensive assets like term deposits as compensation for the higher level of risk borne by the investor.

The argument in support of ESG, which suggests that companies with good ESG scores can access cheaper capital, does not necessarily lead to better investment returns.

The future for ESG is reliant on companies being able to generate a superior return through the application of policies that reflect positive ESG outcomes.

Whilst there are undoubtedly areas of ESG policy that are difficult to measure in terms of shareholder performance, it would be myopic to make an assessment so broad that concludes that the whole concept is without merit.

The thing that everyone will be watching out for (over time) is what impact ESG ratings have on the cost of capital for companies who are adherents to it and the costs for those who ignore it. It will be interesting to see how quickly the cost differentiation will drive innovation. If financing becomes more expensive or difficult to obtain it should see changes to corporate strategies. However this is only relevant if the investor is purchasing investments at fair value. If the company that is an adherent to ESG is trading at a premium as a result of accompanying investor demand, then the lower cost of capital isn’t going to yield any benefits in terms of returns. As always – lunch isn’t free.


Choosing ESG investments because it appeals to a combination of sensibilities and desire for generation of returns maybe an appropriate choice. However, avoiding an investment, or holding an investment in a company doesn’t directly impact that business either positively or negatively. If you sell shares then those shares are purchased by someone else. 

Cash and ownership changes hands, but there is no actual difference to the company whose shares are traded. Only in a capital raising does the company extract funds directly from the public and then utilise this within their business. Investors shouldn’t confuse divestment with a boycott of the company. If 90% of consumers stopped buying petrol tomorrow then oil companies would make changes to their business model. People selling their shares doesn’t change anything in terms of expressing dissatisfaction to the firm and it shouldn’t be confused with an action that the company will act upon.

esg 4

Shouldn’t companies just focus on shareholder returns?

This question has drawn the most political ire and some of it is justified. Not all of it though – you need to take care that your views aren’t driven by evidence that sounds solid but heavily relies on cherry-picked facts and figures.

The main reference around this is Milton Friedman’s famous article in The New York Times Magazine titled ‘The Social Responsibility of Business is to Increase its Profits’. This article was released in September 1970 and Friedman himself died in 2006 – so the discussion isn’t new.

Some of the parts that get referenced most regularly are:

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.” (Friedman, 1970)

“…the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions in accord with his “social responsibility” reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers’ money. Insofar as his actions lower the wages of some employees, he is spending their money. 

The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct “social responsibility,” rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it.” (Friedman, 1970)

Also, frequently the CEO will gain a PR benefit for themselves by using the company’s funds. It may well be for a good cause – but what concern is that to the shareholders. Certainly, a counter argument could be made that the publicity improves the corporate reputation and attracts and retains clients as a result – and that may be true – but it is sometimes tempting to cast a more cynical eye on such things when the gap between benefit going to the CEO and that going to the firm seems to widen so far that they appear unrelated.

One of the things frequently held against the ESG argument isn’t in fact against it – rather it is indifferent – it simply says that the voice of control must be a political one and not a corporate one.

Keep in mind though that a corporation being aware of risks that they are exposed to is very much in their wheelhouse of problems to manage. Whether these fall into one or more of the ESG categories doesn’t mean that addressing the risks make them ‘woke’. There may be legitimate concerns about the way in which ESG strategies are implemented but there can be little doubt that these are risks that need to be managed.

ESG ratings are not consistent enough This is an aspect of ESG that is evolving quickly. This needs to happen, and the reasons can broadly be divided into three main areas:

  • Data being provided by companies is not consistent or directly comparable.
  • Definitions of good/bad ESG is unclear and different factors can’t readily be weighed against one another.

The application of the data is different depending on who the end user is.


The speed of evolution means regular regulatory and legislative updates in combination with policy shifts coming from all the largest ratings agencies.

Another issue is the weighting difference. For instance, when a company makes electric cars which release no carbon, but might have some negative governance idiosyncrasies, the company may be omitted from some ESG rankings because of a failure on one measure despite success in another. This raises the question whether a rating should be an aggregate measure or if it requires a company to receive a passing grade on all measures to be able to pass overall.

As the areas of governance and social responsibility are examined it becomes increasingly more difficult to make the questions asked of firms both quantifiable and readily comparable across different companies and sectors.

Regardless of the methodology that is applied by the various agencies, it needs to be done in a way that makes the highest ranking something that is quite difficult to achieve.


The very well publicised interest and fund flows into ESG investments has led to swags of new products being created to meet the demand. We are seeing substantial regulatory scrutiny and action relating to this type of investment which over time will create a more consistent set of expectations for investors who will be more clear as to what ESG will deliver for them.

window.lintrk('track', { conversion_id: 14400772 });