Is ESG Really What It Is?
Written by Lalana Karri (W’26)
ESG is a common term that has risen in the financial world. Standing for Environmental, Social, and Governance is a non-financial indicator that evaluates a company's commitment to environmental sustainability, social responsibility, and strong governance practices.
So, a common to many ESG equates to financial activism and sustainability. But some questions: does it really?
While adopting ESG principles is hailed as a positive step towards creating a more sustainable and ethical global economy, it is not without its controversies. Many people support it, saying the intersection of business and wellness is optimal. Some others call it baseless. So, let's dive a little into it!
ESG Favoring Argument:
Long-term Sustainability: ESG advocates argue that incorporating it into investment decisions fosters long-term sustainability. By focusing on environmental conservation, social justice, and effective governance, companies can consider the consequences of their actions beyond immediate financial gains. They are making an impact.
Risk Mitigation: Companies proactively addressing ESG issues may be better equipped to manage emerging risks. ESG is still an unknown field, so they are creating more risk-proof strategies when they plan to incorporate it. For instance, businesses with strong environmental practices are less susceptible to regulatory penalties and reputational damage related to ecological degradation.
Market Competitiveness: Investors are increasingly drawn to companies prioritizing ESG, reflecting a broader societal shift towards activism. Firms that embrace ESG principles can gain a competitive edge in attracting capital, customers, and top talent.
ESG Opposing Argument:
No Clear Structure: One of the primary controversies surrounding ESG is the need for standardized metrics and reporting. Many companies say that they support ESG, but frequently, they need help to point directly toward where it is happening in their company. This is because ESG is more philosophical than guideline-based; the need for a universally accepted framework makes comparing and evaluating companies based on their ESG performance challenging. We often see it in a company's values and home page as “We support sustainability,” but there is no clear deliverable.
Genuineness: Opponents argue that ESG initiates "greenwashing." "Greenwashing" is a term coined to represent the typical exaggeration or misrepresentation of ESG initiatives, such as blowing up their sustainability and gender equality efforts. They do this to appear more socially and environmentally responsible than they genuinely are. This raises questions about the authenticity of ESG integration.
Both sides have valid arguments. One says it is good for the business, and an effort for sustainability is being made. Even if it is a small change, change is positive when in the right direction. The other side says ESG is baseless in structure and authenticity.
For these reasons, many industry leaders are torn over where they stand with this issue, seeing that there is logic on both ends. What do you think?
**For more information about what ESG is, visit this website** https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp