If Gov. Ron DeSantis went back to Yale, the university’s Initiative on Sustainable Finance would have taught him that ESG (Environmental, Social, Governance) refers to the criteria that investors use to assess risks and opportunities. It’s not “woke capitalism” or an “ideological joyride.” Rather, it is designed to maximize the highest rate of return through an enhanced capacity to identify all types of risk, including those that derive from climate change or bad corporate governance.
If he went back to Harvard, DeSantis would have learned that the university’s $51 billion endowment has for a long time now integrated into its decision-making process, “in its sole discretion,” the ESG factors that “have, or have the potential to have, a material impact on the financial performance of an investment,” as stipulated in the endowment’s policy.
The governor of Florida is using his powerful position to distort the concept’s basic meaning and advance his own solo political career. Other GOP governors are tagging along as it is paying off in terms of public visibility. Outside the United States, finance scholars, successful corporate leaders and market-savvy politicians look with bewilderment at how GOP politicians fell into an illusory truth trap, the tendency to believe false information to be correct after repeated exposure.
Is ESG a “socially conscious investing movement,” as DeSantis puts it? The governor’s vision is outdated by three centuries. It was in the 18th century that the Quakers and the Methodists advocated that capital allocation should be religiously and ethically motivated. Or by half a century, if we consider the pro-human rights, socially responsible movement of the 1960s that pulled money away from South Africa’s apartheid or Vietnam War-supporting companies.
In its modern reincarnation, at the dawn of the millennium, ESG refers to a set of trackable indicators meant to help firms understand the environmental, social and governance financial opportunities they could pursue and the risks they are exposed to. Integrating ESG factors into financial analysis is a token of responsible money management and an embrace of fiduciary duties. By accounting for all kinds of characteristics of an asset — financial and ESG — corporates and investment firms have a more sophisticated, holistic and accurate view of its dynamics. Old-school finance is like getting diagnosed with an X-ray, whereas modern finance, the one that includes ESG factors, is more akin to an MRI.
As the Harvard endowment writes, “ESG factors may have a direct financial impact on an investment.” Companies facing harassment or discrimination claims may have their ability to attract talented employees impaired. Real estate firms with coastal assets may face the negative impacts of sea level rise caused by climate change. There are literally hundreds of ways ESG factors could affect a company’s financial performance.
A meta-analysis from New York University and Rockefeller Asset Management, which aggregated findings from more than 1,000 research papers authored between 2015-2020, finds ESG drives better financial performance. DeSantis’ crusade against ESG is actually a value destroyer.
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DeSantis’ fury against his peculiar view of ESG is actually distorting and shrinking the investment universe. The latest anti-ESG legislation in Florida creates barriers and constraints movements for those responsible and market-driven investors who look for all types of information and opportunities to pursue profit-seeking endeavors.
ESG-leaning investors may consider investing in all industries, including oil and gas companies, assuming that ESG risks are adequately integrated into valuation methodologies. The Dow Jones Sustainability Index, which tracks the performance of the world’s top sustainable companies, includes the oil and gas sector.
What the governor is attempting to demonize is not ESG but rather a niche investment discipline called impact or thematic investing, which aims at generating positive, measurable social and environmental impact, separate from, and in addition to, a financial return. These investments aim to contribute to the U.N. Sustainable Development Goals. The Harvard endowment does not have a mandate for impact investment.
Outside the United States, the world of ESG is gradually becoming more standardized, regulated and mathematical. It is relinquishing its ethical and socially responsible roots to give way for a science-based approach to make investments with better risk-adjusted returns. European regulations such as the Corporate Sustainability Reporting Directive or the Sustainable Finance Disclosure Regulation ensure that corporate and financial organizations properly report on their ESG work. Data, including the ESG data that is generated from the need to comply with these regulatory frameworks, expedites sound financial decisions. In mature financial hubs, virtually all investment managers consider — with varying sophistication — ESG factors. Using DeSantis’ phraseology, not integrating ESG factors would be political, ideological or irresponsible.
Right after taking office in 1981, in the famous “Address to the Nation on the Economy,” President Ronald Reagan claimed that if American workers had the tools and equipment that workers in the other industrial nations have, the country would improve its productivity and industrial capabilities. DeSantis should allow Florida’s corporate and financial organizations to have the ESG tools other financiers in other countries have.
Rodrigo Tavares is adjunct full professor of Sustainable Finance at NOVA School of Business & Economics (Nova SBE) in Portugal and World Economic Forum Young Global Leader.