Because ESG is overrated. Word of the Economist by Redazione Start Magazine

According to the Economist, the abbreviation ESG should be reduced to a single letter: the "e" of "emissions". That's why If you're the kind of person who doesn't like to invest in companies that pollute the planet, mistreat workers, and stuff their boards of directors with cronies, you're no doubt familiar with one of the hottest trends in finance: environmental, social, and governance (ESG) investment. It is an attempt to make capitalism work better and to address the serious threat posed by climate change. In recent years it has had a surge; the titans of investment management claim that more than a third of their assets, or $35 billion in total, are monitored through one esg lens or another. It is on the lips of leaders and officials around the world. You might hope that great things will come out of all this. You would be wrong. Unfortunately, these three letters have become a watchword for the clamor and controversy. Right-wing American politicians blame a "climate cartel" for rising prices at the gas pump. Whistleblowers accuse the industry of "greenwashing", deceiving their customers. Companies, from Goldman Sachs to Deutsche Bank, are facing regulatory investigations. As our special report this week concludes, although ESG is often animated by good intentions, it is deeply flawed. It risks setting contradictory targets for companies, robbing savers and distracting from the vital task of tackling climate change. It is a mess that must be rationalized mercilessly – writes The Economist. The term esg dates back to 2004. The idea is that investors should evaluate companies not only based on their business performance, but also based on their environmental and social outcomes and governance, typically using numerical scores. Several forces pushed it to become a mass phenomenon. More people want to invest in a way that is in line with their concerns about global warming and injustice. More companies, including a subsidiary of The Economist, offer ESG analysis. With governments often blocked, many believe that businesses need to solve society's problems and serve all stakeholders, including suppliers and workers, not just shareholders. And then there is the self-interest of an asset management industry that you don't look into your mouth: selling sustainable products allows it to bill more, alleviating the long plague of falling commissions. Unfortunately, ESG suffers from three fundamental problems. First, because it packs together a dizzying set of goals, it does not provide consistent guidance for investors and companies to make the trade-offs that are inevitable in any company. Tesla's Elon Musk is a nightmare for corporate governance, but spreading electric cars is helping to tackle climate change. Shutting down a coal mining business is good for the climate, but it's terrible for its suppliers and workers. Is it really possible to quickly build a large number of wind farms without harming the local ecology? By suggesting that these conflicts do not exist or can be easily resolved, ESG fosters illusion. The industry's second problem is that it is not sincere about incentives. He argues that good behavior is more profitable for companies and investors. In fact, if you can bear the stigma, it is often very profitable for a company to outsource costs, such as pollution, to society rather than bearing them directly. As a result, the link between virtue and financial performance is suspicious. Finally, ESG has a measurement problem: the various scoring systems have significant inconsistencies and are easily circumvented. Credit ratings have a correlation of 99% between the various rating agencies. In contrast, ESG ratings correspond to just over half the time. Businesses can improve their esg score by selling assets to another owner who continues to run them as before. Investors are increasingly skeptical of these frauds. This, together with the turbulence of financial markets, is slowing the inflow of money into sustainable funds. It is therefore time to think again. The first step is to disaggregate the three letters: e, s and g. The more goals there are to achieve, the less chance there are of hitting one of them. As for letter s, in a dynamic and decentralized economy individual enterprises will make different decisions about their social conduct in pursuit of long-term profits in accordance with the law. Tech firms can appeal to the values of young employees to retain them, while businesses in declining sectors can be forced to lay off. There is no single model. The art of management, or g, is too subtle to be captured by a box. Publicly traded UK companies have an elaborate code of governance and poor performance. It is better to simply focus on the e. But even this is not accurate enough. The environment is an all-encompassing term, which includes biodiversity, water scarcity, and so on. By far the most significant danger is emissions, particularly those generated by carbon-producing industries. Put simply, the e should not indicate environmental factors, but only emissions. Investors and regulators are already pushing to make corporate disclosure of emissions more uniform and universal. The more standardized they are, the easier it will be to assess which companies are big responsible for carbon emissions and which are doing more to reduce them. Fund managers and banks should be able to better monitor the carbon footprints of their portfolios and whether they shrink over time. Indefensible Better information alone will help in the fight against global warming. By revealing more accurately which companies pollute, it will help the public understand what really makes a difference to the climate. An increasing number of altruistic consumers and investors may choose to favor clean businesses even if this entails a financial cost. And although today they can get away with polluting, many companies and investors expect that sooner or later stricter regulation on carbon emissions will come and want to measure their risks and adapt their business models. But make no mistake: tougher government action is now essential. We have long advocated the need to raise carbon prices to exploit the market and save the planet. Today, pricing systems cover 23% of global emissions, about twice as much as five years ago. But much more needs to be done, not least in America. It is government action, coupled with clear and consistent disclosure, that can save the planet, not an abbreviation that risks being synonymous with exaggerated and superficial nonsense. (Excerpt from the press review of eprcomunicazione)