Does ESG provide the right outcomes for sustainable development?
William Oakeley
With an increased emphasis on climate change and sustainability many investors are seeking greener ways of making a return on their investment. The introduction of environmental, social and governance criteria (ESG) have been a key framework in aiding this. ESG is a set of standards with which to evaluate and measure a company’s social and environmental impact , leading to long-term sustainable development. Britannica defines sustainable development as an ‘ approach to social, economic, and environmental that attempts to balance the social and economic needs of present and future human generations with the imperative of preserving, or preventing undue damage to the natural environment ’ . As companies adopt basic ESG principles, e.g. achieving net-zero and using energy efficiently. However, there are some issues surrounding ESG, such as greenwashing and a lack of stakeholder transparency and engagement, which may inhibit its effectiveness in improving sustainable development. According to Kelly Anne Smith, ‘ The number of investment managers reporting at least one ESG fund in their holdings has grown 300% since 2016 ’ (Smith, 2022), suggesting that not only is ESG investing a growing industry, but also that there is an increasing demand for companies with high ESG scores. Therefore, if you are a company who is seeking greater investment, you are incentivized to engage with it to drive up demand for your shares and make yourself more reputable. This creates its own dilemma, however, known as greenwashing. An example of greenwashing might be when a company launches a new ‘ green ’ clothing line, despite not amending any of its practices. Sustainability is claimed, but not substantiated. In order to address the issue of greenwashing there needs to be an improved transparency among companies towards investors: detailed information and data should be available about their operations and how they align with their perceived ESG rating. But investors also need to be active in researching ESG claims by companies before investing in them in order to verify if they are genuinely sustainable. The problem is that greenwashing undermines the credibility of ESG ratings, which can lead to skepticism from both consumers and investors. Greenwashing also inhibits sustainable development as investors will misallocate capital as they will inject funds into companies that are not actually sustainable away from those which are. This means ESG may have little effect on improving sustainable development unless stricter regulations and improved transparency are implemented. However, some companies have been successful in implementing ESG strategies to improve sustainable development. One of which is Alphabet ( Google’s parent company ). They have dedicated $5.57 billion from their ‘ sustainability bond ’ in order to fund ‘ environmentally and socially responsible projects ’ (Buchholz, 2022). This is a positive example of a company that is using sustainability initiatives and its ESG targets to improve sustainable development by reinvesting its profits into green initiatives. Another example of a large corporation using ESG to improve sustainable investment is Intel, the tech company, where they have committed to ‘ Net-zero GHC across its global operations by 2040 ’ . This is a significant as, according to Sustainability magazine, ‘ the manufacturing industry
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