ESG's original claim to fame was that the returns in companies that took longer-term risk profiles. The idea is to find greater "value" for investors and ESG was to provide and easier way to rank companies. ESG considers the physical environmental impact of the companies they were investing in, the social impact internal and external the companies were having, and the "progressiveness" of governance programs (i.e., openness).
Of course, as soon as you commodify a metric, it becomes useless. And, that is exactly what happened to ESG. It was game before and some became experts in gaming the system to greenwash and provide some rather fake advertizing for their shares.
The inevitable backlash was from the far right-wing who saw the ESG as an easy target for continuing their hate-inspired "anti-woke" reactionary politics. The left called ESG irrelevant to the broader program to actually get progressive environmental, social, and corporate governance reform.
All in all, it probably was useful for about 10 minutes for the companies who were already doing well in these areas during the time of free money.
Some of the recent responses to ESG's "controversial" status have been:
- Someone noticing that many fast fashion firms are included in ESG indexes.
- Hydrogen investment (read: oil and gas companies) are able to gain an ESG rating.
- ESG "commitments" have come under regulatory scrutiny because they are so dubious and amount to false advertising.
- Some companies who pioneered ESG have had to pull back from the branding they built because of increased price and profitability of "dirty" and "bad" corporate actors. Since the point of ESG was to seek profits while doing good, that stops making sense when there is more profits from doing bad.
Recent discussions have even emerged about removing "S" from ESG—because doing good is only doable when profits are high from exploiting workers.
The new programs around the environment and private capital investment are about new products released by governments setting up markets for debt.
Some of those are
- "Sustainability-linked" bond issuance and/or investments. This is supposed to be a better way to hedge your risk of wanting to do something, but not actually doing anything in the end.
- Outcome bonds. These seem to be a slightly different, higher yield version of the regular green bond targeted to specific private-sector supporting investments. The problem with Green Bonds—for the private sector—was the government could really use that money for anything without being disciplined by capital.
- Carbon markets. These continue to provide government-subsidized programs for companies to continue to pollute by hedging that cost and then getting that cost subsidized by the consumer.
All in all, there is lots to discuss about the failure of these rather esoteric "climate capital" initiatives. The problem is that they continue to be areas where a lot of talk is happening about how to deal with climate change and other externalities created by capitalism, but without doing actually anything about those externalities.
If only there were another way.