Giving Compass' Take:
- There is controversy and debate about ESG in the social sector and will continue to impact the younger generation of donors and investors that may use criteria to evaluate for-profit companies for investment.
- How can ESG considerations improve over time to become more useful for investors? How does ESG affect the impact investing sector?
- Learn why ESG needs stricter requirements.
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The acronym “ESG” stands for “environmental, social, and governance.” Those three terms are general categories covering the range of criteria that can be used to evaluate for-profit corporations, often to determine if an investor should invest in, or divest from, that company. Environmental criteria might include the company’s total carbon footprint or how it addresses waste or pollution. Social criteria can relate, for instance, to the corporation’s labor practices or its contributions to charity and community engagement. And governance criteria might look at board diversity or salary differentials and transparency (Investopedia, 2022).
While there are several types of criticisms leveled against ESG in this current backlash, the most common are:
- ESG perpetuates “wokeism” and “cancel culture.” Critics argue that ESG is merely a way to impose “woke” progressive ideals and restrictions outside of normal political channels, and that it unfairly discriminates against certain companies and encourages people to “cancel” them as “enemies” (Green & Kishan, 2022).
- ESG investments underperform and prioritize politics over free markets. While both sides cite different data on this point, critics claim that ESG-approved investments financially underperform, thus harming investors, consumers, and others (Keeley, 2022). More generally they argue that ESG interferes with free markets, and forces companies to try to please activists rather than shareholders.
- ESG measurements are faulty and easily manipulated. Many anti-ESG arguments focus on the quality of the ESG measurements themselves, pointing to examples where companies like ExxonMobil get rated higher than ones like Tesla (Taparia, 2021). (This last example led Elon Musk to call ESG a “scam.”) The “greenwashing” critique fits here as well, noting how rating systems can be easily fooled by savvy corporations.
This rapidly intensifying backlash against ESG considerations will affect philanthropy more and more as impact investing by philanthropic institutions continues to grow — as most expect it will — and as younger donor-investors continue to use both their giving and their investing as integrated tools for social change. This will likely be another way that philanthropy gets increasingly drawn into the nation’s “culture wars” (Behrens, 2022). In fact, it’s already happening: the Philanthropy Roundtable’s October 2022 Annual Meeting featured a keynote panel discussion on “ESG: An Insidious Threat to Free Society and Philanthropy” (2023, para. 2).
To help navigate the difficult waters ahead, it is clear we need better, more long-term data on the performance of ESG investments. For nonprofit and foundation endowments, this data is vital because lower returns theoretically mean less money available for grantmaking or nonprofit programs, even if the investments are also advancing the mission.
Read the full article about ESG philanthropy and impact investing by Michael Moody at Johnson Center.