The ESG movement is growing increasingly popular in the world of business and investing — but what is it exactly? And how is it measured?
Elon Musk is in the news for more than one reason this week — the less serious of which is the tweet he posted about ESG. Keep reading for all the basics you need to know about the ESG movement and investing, as well as Musk’s thoughts on the practice.
What does ESG stand for? The meaning is becoming increasingly important to consumers and investors.
ESG stands for environmental, social, and governance. In business and investing, ESG is a way to evaluate and rate how sustainable and ethical a company is.
Specifically, an ESG assessment of a company would look at its policies in relation to the planet, such as waste management, energy use, and emissions (environmental); how it treats its employees, diversity in the workforce, and human rights practices (social); and how leaders operate the company, the diversity of leadership and board members, political donations and lobbying, and legal issues (governance), according to NerdWallet.
What is ESG investing?
Similarly, ESG investing is the practice of looking into a company’s ESG ratings when considering making investments. So, rather than just examining potential financial returns, someone committed to ESG investing would also consider how sustainable and ethical a company or stock is before investing.
And ESG investing isn’t only done by individuals — the majority of ESG investment money (72 percent) comes from massive investors, such as endowments at universities, pension funds, and charities, as per US SIF data via AP News.
What is the ESG movement?
The ESG movement refers to the growing trend of companies making ESG-related commitments, and investors getting more into ESG investing.
As reported by AP News, ESG investing is on the rise — according to US SIF, investors considering ESG standards controlled $16.6 trillion in U.S.-based assets at the beginning of 2022.
With so many issues in the business world as related to environment impact, social ethics, and corrupt leadership, and with these issues harder to keep under wraps than ever, thanks to growing social justice movements, it’s no surprise that people are starting to put their money where their mouths are in terms of investing, and that businesses are making pledges to be better in these areas.
That said, greenwashing, inexhaustive data, and other factors surrounding ESG have left some people skeptical that a high ESG rating really means all that much.
Elon Musk and some others are critical of the ESG movement.
An August 2019 study from the University of Zurich analyzed ESG ratings compiled by six different ESG rating agencies. Overall, the researchers found that each firm’s ratings of a company differed significantly, since ESG measurements tend to be fairly subjective. Forbes noted that “ESG data is sparse, and reporting frameworks are woefully inconsistent.”
Additionally, as more and more consumers and investors demand sustainability and ethics from corporations, corporations are responding by upping their ESG data and pledges — but that is not always for the “right reasons.”
For instance, Larry Fink, CEO of massive investment corporation BlackRock, recently stated: “We focus on sustainability not because we are environmentalists, but because we are capitalists,” as reported by Forbes. Basically, CEOs are starting to realize that people want to support companies that are more sustainable, so they are making their companies more sustainable (or, at least, saying they will) solely in order to become more attractive to investors and customers, and therefore make more money.
In a blog post, the S&P 500 explained that it booted Tesla due to allegations of racism and unjust factory working conditions, as well as the company not having a low-carbon strategy or business code of conduct.