The positive case for ESG and why the USA is in danger of getting it wrong

Environmental, social, and governance (ESG) factors are essential for investors to evaluate a company’s long-term sustainability and potential risks. Despite the recent backlash in some US states, ESG is a vital tool for investors, companies, and society as a whole, argues David Duffy, CEO and co-founder of the Corporate Governance Institute.

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Environmental, social, and governance (ESG) factors are becoming increasingly important for investors looking to assess the long-term sustainability and potential risks associated with a company’s operations. Despite the obvious benefits, ESG has recently come under increasing scrutiny in America, with Florida Governor Ron DeSantis approving a resolution that bars his state’s pension fund from considering ESG factors in making investment decisions. It’s not just in Florida either, Texas quickly followed suit with anti-ESG laws of their own.

I’ve been shocked by the backlash and, unfortunately, it seems that ESG is now firmly caught in the crossfire of the culture wars.

ESG is a crucial tool for investors to evaluate a company’s long-term viability. By considering the company’s environmental impact, social responsibilities, and governance structure, investors can identify potential risks that may not be apparent in a company’s financial statements. For instance, a company with a poor environmental record may be vulnerable to costly lawsuits, while a company with weak governance structures may be at greater risk of fraud.

ESG isn’t just about the investors; it helps companies to identify opportunities to improve their operations and become more sustainable. For example, we’ve seen time and again that companies prioritising their environmental responsibilities can reduce their carbon footprint and save on energy costs, while those that invest in social responsibility can improve their reputation and attract top talent.

The move to ban ESG in investment is short-sighted and ignores the growing importance of sustainability and social responsibility in the business world. It also ignores that many investors are increasingly interested in companies prioritising ESG factors.

Rather than offering investors a free and fair market, the anti-ESG snake-oil salesman is stifling growth in their states. Ron DeSantis says he wants to maximise financial return over and above other considerations. If I had the opportunity to explain one thing to DeSantis, I’d help him understand ESG is all about maximising financial returns and even better, we can make the world a better place whilst we’re doing it.

To my dismay, banning ESG is regularly framed as a culture war issue, with some arguing ESG is part of a leftist agenda. This is all despite ESG not being a political issue; it’s simply a tool for investors to assess risks and opportunities. Furthermore, many companies and investors across the political spectrum recognise the importance of ESG and have been incorporating it into their investment decisions long before the culture wars ignited.

Several studies have shown that companies prioritising ESG outperform their peers in the long run. For instance, a study by MSCI found that high-ESG-rated companies were more profitable, paid higher dividends and showed slightly higher valuation levels when they controlled for other financial factors over a 10-year period between May 2007 and November 2017.

ESG is not just about doing the right thing; it is also about creating long-term value for investors. Companies prioritising ESG are more likely to have a sustainable business model and a competitive advantage in the long run. For instance, companies that prioritise environmental responsibility may be better positioned to navigate regulatory changes and capitalise on new market opportunities, while those that prioritise social responsibility may have more engaged employees and customers.

No matter what political ideologues might try to sell to the public, ESG is a valuable tool for investors to assess long-term sustainability and potential risks. It is not and never will be a political issue, and it should never have been caught up in the US culture war.

More on ESG:

Why organisational sustainability strategies must include EVs

Consumers believe ESG should now be mandatory

After greenwashing: A guide to effective environmental and offsetting targets

‘No real reductions’ from leading carbon offsetting credits


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