The industry is capitalizing on enormous public demand for genuinely responsible investing options, but it is diverting this otherwise powerful force for good toward a false solution that only makes matters worse.
Asset managers advertise ESG investment funds as a way for everyday investors – especially young people – to align their money with their values. In recent years, millions of people have shifted their retirement savings from traditional index funds to those carrying the ESG label. Their rising popularity is fueled by industry executives and marketing materials that claim they are helping investors “build better portfolios for a better world.” Unfortunately, they don’t.
The process through which companies’ ESG ratings are determined and then used to tailor investment portfolios has funneled enormous amounts of capital to companies that look good on paper, but have terrible real-world impact. This is in part because the ESG ratings on which the whole industry is based only reflect information that the ratings agencies consider “financially material” – factors that could materially impact the profitability and value of a company – not information about its real-world impact