The End of ESG
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In my article, ‘The End of ESG’, which was recently made available on SSRN, I argue that ESG is both extremely important and nothing special. It's extremely important because it's critical to long-term value, and so any practitioner or academic should take it seriously, not just those with ‘ESG’ in their job title or list of research interests. Thus, ESG doesn't need a specialized term, as that implies it's niche. Considering long-term factors when valuing a company isn’t ESG investing; it’s investing.
It's nothing special since it's no better or worse than other intangible assets that drive long-term value and create positive externalities for wider society, such as management quality, corporate culture, and innovative capability. The following implications follow:
1. Companies shouldn't be praised more for improving their ESG performance than these other intangibles; investor engagement on ESG factors shouldn't be put on a pedestal compared to engagement on other value drivers. We want great companies, not just companies that are great at ESG.
2. Investors who greenwash are correctly being held to account. But so should other investors who fail to walk the talk, such as actively-managed funds that closet index or systematically underperform. Clients of non-ESG funds deserve the same protection as clients of ESG funds.
3. Practitioners shouldn’t rush to do something special for ESG factors that they wouldn’t for other drivers of value, such as demand that every company tie executive pay to them, force a firm to report them even if not relevant for its particular business, or reduce complex intangibles to simple quantitative metrics.
4. Many of the controversies surrounding ESG become moot when we view it as a set of long-term value factors. It’s no surprise that ESG ratings aren’t perfectly correlated, because it’s legitimate to have different views on the quality of a company’s intangibles. We don’t need to get into angry fights between ESG believers and deniers, nor politicize the issues, because reasonable people can disagree on how relevant a characteristic is for a company’s long-term success.
Alex Edmans is Professor of Finance at London Business School and Academic Director of the Centre for Corporate Governance.
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