Last year, $13 billion was pulled from Environmental, Social and Governance funds, marking a significant downturn in contributions to these ‘sustainable’ investment options. ESG investing targets companies that value environmental awareness, social impact and effective governance. They rely on the idea that these companies involve less long-term risk than companies deemed most profitable by traditional investment analysis.
Part of this backlash against ESG has been political, as high-profile Republicans continue to deny the realities of climate change. Rep. Andy Barr, R-Ky., has called ESG investing a “cancer in our capital markets” that is “politicizing capital allocation and actively discriminating against fossil energy,” while government officials in Florida, Louisiana and Missouri have divested over $3 billion from ESG-focused investment management giant BlackRock.
Companies that score poorly on environmental measures generally have higher projected returns than ESG-friendly ones. But continuing to invest in them creates a vicious cycle: Without robust investment, how can climate-conscious companies evolve to outpace the fossil fuel giants that have long cornered the market? ‘Sustainability’ may have become a politicized buzzword, but it really shouldn’t be. Sustainability goals aren’t inherently ‘capital D’ Democratic, but attempts to create a world that can be sustained for future generations, regardless of political party. Are higher profits worth escalating the collapse of our species?
Looking at this issue based purely on profits also ignores the crucial economic consideration of increased climate change’s monetary impact. The National Oceanic and Atmospheric Administration put the cost of U.S. climate disasters at $92.9 billion last year. The average cost per year has increased each decade since the 1980s, concurrent with the rising average global temperature. This economic crisis (along with its social, political and environmental aspects) will only worsen as extreme weather events increase unless we make immediate and significant changes to our reliance on fossil fuels.
Of course, ESG scores are an imperfect solution and may not accurately reflect a company’s risk. They are not standardized, with various rating agencies using their own criteria and the potentially limited data companies choose to share. Some ESG indexes, like the S&P 500 ESG, include the least reprehensible companies within each particular industry, so it could even include energy companies that actively extract and burn fossil fuels. In addition, many ESG scores may be artificially improved through rater bias from third-party rating organizations or by measures taken by companies themselves, such as failing to provide certain data.
Furthermore, many fossil fuel-dependent companies increase their ESG scores by offsetting carbon emissions: reducing their carbon footprint with actions that reduce emissions elsewhere, whether that is by planting trees or providing clean energy technology in developing countries. For example, natural gas producer BVK has been attempting to provide “guilt-free” gas by offsetting its emissions through carbon capture. However, being “carbon neutral” is not enough considering the levels of climate change already present. While offsetting carbon emissions is better than doing nothing, carbon capture and other carbon-negative initiatives should be implemented in conjunction with greener forms of energy — without being used to ‘balance out’ still-harmful fossil fuel usage.
Our decisions on climate investing have the power to echo through generations to come. We need to actively choose to invest in funds and companies that are working towards positive environmental incomes, regardless of the ESG label.
One option is activist investing which includes buying a significant minority stake in a company in order to influence the company’s trajectory. This strategy is used by investment firms such as Arjuna Capital and Follow This, which are currently being sued by Exxon Mobil because Exxon felt that they were attempting to “diminish the company’s existing business.” While activist investing may be out of reach for most Tufts students, there are many people in the greater Tufts community that should consider the power their money and influence can have in efforts to halt and reverse climate change.
Impact investing, on the other hand, can be achieved with even a very small amount of capital. It refers to investing money in companies with specific intended environmental (or social or political) effects. While this form of investment may take a bit more time and research than throwing your money into the S&P 500 or an ESG fund where environmental results are difficult to quantify, it means putting your money towards a sustainable (and livable) future.
Still, investors with varying agendas can only do so much. Government policy is the only way to force immediate change. Boston Mayor Michelle Wu ran on a “Green New Deal for Boston,” and has since divested $65 million in city investments from fossil fuel companies, while President Joe Biden signed the Inflation Reduction Act, which included the largest climate action investment in history. In fact, this bill included far less to combat climate change than the Build Back Better bill he championed, which would have cut U.S. emissions in half by 2030 but could not pass in Congress. Invest in the future with your votes for candidates up and down the ballot that have demonstrated their commitment to climate action.
ESG funds may not be the answer, but their deficiency does not mean we should stop finding ways to invest sustainably. Activist and impact investing are possible ways forward. Unless you are a 90-year-old oil and gas CEO with nothing to lose, it's not only environmentally responsible but also the most economically prudent choice.
