What's all the buzz about ESGs? Should I Care?

March 21, 2023

By Jim Wylie - PA Chapter vice chair

Because I know I only have, on average, 200 words before you click to the next article/notification/incoming text, I'll jump right to my answer to this question:

Yes, you should care, but don't flip out. 

I was inspired to write the blog post for the Sierra Club of Pennsylvania's Sylvanian after listening to The Daily blog titled "What is E.S.G, and Why Are Republicans So Mad About It?". It's a 28 minute listen. I recommend it. Scroll down to March 13th. 

ESG image
Environmental social governance-Sergei Babenko, Alamy-2021


Briefly, Environmental, Social and Governance (ESG) is a rating system adopted by several corporate rating entities (like Moody's, Sustainalytics, MSCI ESG, Dow Jones) that attempt to rate what corporations say their goals are and what evidence that they are actually moving towards stated goals for things like net-zero carbon emissions, pollution standards, social equity and diverse hiring practices and transparent corporate governance. Perhaps you remember CSR - Corporate Social Responsibility. Or SRI - Socially Responsible Investing. If you Google these terms now, you'll be offered links to ESG sites. ESG is the buzzword of the 2020's.

The latest "buzz" is because after some oil/gas companies where denied a loan by some heretofore "reliable investors" (like JPMorgan Chase) because, they were told, "we think oil/gas exploration is a risky proposition in a world that is cutting back on carbon based energy". The oil/gas companies complained to their state lawmakers (Texas) who quickly saw the writing on the wall and reacted by pulling its pension funds out of JPMorgan. Then Florida followed suit. No doubt following influence from fossil fuel industry lobbyists. Vanguard flinched and withdrew from the Net Zero Asset Managers Initiative (while saying they still hold the same environmental goals). Pennsylvania Representatives have introduced similar legislation (pahousegop.com). Ironically (sadly) many of the states that claim to be guarding against "woke banking" are feeling the brunt of climate impacts already (Motley Fool).

And finally working its way to the US Senate, where a Labor Department rule requiring ESG consideration was removed for federal pension plans. Biden then used his first veto to block that move, bringing "ESG" to the top of news page, and ensuring that a somewhat straightforward rating system for corporate accountability is now seen in a fully partisan light.

Who cares?

Yes we care. Investing in companies that either produce fossil fuel based energy or companies that have no plans to transition to clean renewable energy is bad for the planet and a short-sighted business plan. The recent headlines are a direct result of fossil fuel industry lobbyists. Not level-headed business leaders and lawmakers. 

But don't flip out. ESG, perhaps a new acronym yet to be anointed, is here to stay. Investors get it. Asset managers get it. The easy-money-for-oil-and-gas-exploration days are numbered (maybe not over, but numbered). They just don't like making headlines.

Not all financial analysts agree - even within an institution. Note these 2 headlines from last year in the Harvard Business Review, just 14 days apart:

But I believe the tide has turned. Big asset managers are slowly turning this ship towards sensible, farsighted investing.

More references: