What is ESG investing?

Transparency no doubt keeps organizations more accountable, but public companies need to reconnect with their true owners.

JOHN FULLERTON: The idea of ESG in investing—which stands for environmental, social and governance—has been around probably for 20 years now. It sort of followed the SRI movement—socially responsible investing—and this was our attempt to think beyond shareholder value and what other values matter to the health of a corporation in the long run. So ESG: environmental, the company's environmental performance and behavior; social, the way it treats its employees, the way it treats its consumer, the way it behaves in its community, healthcare benefits that it gives that kind of thing; and G, governance, is the company well governed or not well governed? And they're sort of common sense recognition that those attributes and those values are also important. It's not just shareholder value, it's a broader set of values. And there's been probably billions of dollars invested in measuring and disclosing ESG factors by public corporations and of course more disclosure about these issues is definitely good. The old saying 'sunshine is the best disinfectant', so if companies are required to report on these things they're going to manage them and that will be a positive outcome.

What that whole idea, though, failed to address is the thing I talked about earlier, which is that public companies that operate in public capital markets, whether they disclose everything perfectly or not, are sitting in a system where they've been separated, the relationship between their true owners has been separated by the capital markets or disintermediated by the capital markets. And their engagement with their direct owners may be once a year at the annual meeting in a proxy vote, but in a private company, for example, the owners of the company are on the boards of directors, their wealth is tied up in the company and they pay very close attention to the company. So I'd argue that we'll never solve the unsustainability crisis in business simply through more transparency, ESG and otherwise. We need to use that data to manage businesses, but we also need to reconnected them fundamentally with the owners of enterprise.

And the thing about the principles of living systems is that they're not kind of a menu you can pick and choose from; healthy living systems operate in accordance with all of them all at the same time, or a system gets sick and dies. You get cancer when at a cellular level you're not communicating effectively. So ESG can be all well and good, but if we don't also deal with the right relationship point it goes for naught and I wouldn't at all suggest that the work in the ESG movement over the last 20 years has not been beneficial, but certainly even the most adamant champions of it had acknowledged that it hasn't achieved the outcomes that they'd hoped. And it's interesting that I now often get invited to an ESG conference because people in the ESG community recognize that there must be something more to it than the work that they're working on. And I used to say are you sure they're ready for my message because it's not consistent with their worldview and that's no longer a concern, people are hungry for fresh ways to think about things. So that's progress.

  • ESG in investing stands for environmental, social and governance. It is a set of criteria investors can use to understand the values and the future of an organization.
  • Companies pour resources into disclosing their ESG because, as the saying goes, sunlight is the best disinfectant. Or so has been the thought for many years.
  • While ESG is undoubtedly good, says John Fullerton, mere transparency is not going to solve the world's sustainability issues. For that, public companies need to act more like private companies and be responsible to their owners.

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