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Should we believe in ESG as a new investment standard?
The ESG principles are not a clear-cut solution to today's global challenges, and regulating their adoption presents both pros and cons, not least of which is whether the public has sufficient knowledge about them to make informed investment decisions.
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Activists and protesters march on Nov. 27, 2020 during the Asia Climate Rally toward the Energy and Mineral Resources Ministry in Central Jakarta. They demanded both the government and businesses stop funding fossil fuel expansion to help mitigate climate change. (JP/Dhoni Setiawan)
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arious stakeholders, including regulators and investors, have now embraced the concept of corporate social responsibility (CSR), which has evolved into today's environment, social and governance (ESG) framework.
Over the past two decades, companies worldwide have been encouraged by investors to adopt ESG principles in their strategies. Data from the Global Sustainable Investment Alliance indicates that green investments exceeded US$35.3 trillion in 2020, with the highest percentage of investment in European companies with 42 percent, followed by American companies with 33 percent.
In recent years, the growing impact of social and environmental challenges, such as climate change, child labor, unfair wages and income inequality, has prompted companies to implement a more systematic approach to reporting, known as ESG reporting.
The most significant difference between financial disclosures, which we might be more familiar with, and ESG disclosures is their intended audience. Financial reports primarily target parties with a direct interest in the company, such as shareholders, creditors and regulators. In contrast, ESG disclosures reach a broader audience, including customers and society at large.
However, it is essential to understand that the ESG approach is neither a perfect business model nor a flawless business practice. The gaps within the ESG framework provide room for debate, with both pros and cons. These debates extend beyond the professional sphere and into the academic world, especially in the fields of accounting, management and finance.
Proponents of ESG argue that companies should take responsibility for addressing social problems like poverty, low social welfare and environmental sustainability, shifting these responsibilities from governments to businesses. This perspective may seem normative. Companies that integrate ESG principles into their business strategies often receive positive responses from the public, resulting in higher market value and improved company performance. As a result, sustainable investing is emerging as a new standard in the world of investment.
On the other hand, opponents of the ESG approach have not been silent, and assert that these principles, implemented through CSR, can be seen as a breach of shareholder trust. Companies' tendencies to prioritize CSR programs over profitable business decisions, without clear benefits or justifications, are viewed as a form of corporate "betrayal" of investors.
