The Trillion-Dollar Fantasy: Linking ESG investing to planetary impact

Investors are finally taking environmental, social, and governance investment seriously, but as currently practiced, most ESG investing delivers little to no social or environmental impact, says Fletcher senior lecturer Kenneth Pucker in his recent article in Institutional Investor.

Pucker explains that despite the progress made in ESG investing, it will soon become clear that the exaggeration of the win-win of the so-called “investor revolution” is distracting from the work needed to reset our economic system. “As ESG investing has been accelerating, the planet has experienced the warmest two decades on record, Antarctica has been melting, U.S. income inequality has been gapping, and species have been disappearing at rates unseen for millennia. And the Dow Jones Industrial Average is hitting new highs and asset managers are collecting attractive fees to oversee a popular new investment category”, he says.

Pucker explains that BlackRock, the world’s largest asset manager, announced another milestone: It had raised $1.25 billion for its U.S. Carbon Transition Readiness ETF, the largest exchange-traded fund in history. In his opinion, this should be something to be celebrated, but in reality it represents the peak of a longstanding charade, which he compares to a five-part Kabouki play:

  • Act I: Companies wake up to their responsibility to address growing social and environmental challenges. 
  • Act II: Academics create a body of research around the topic.
  • Act III: Ratings agencies, index providers, data firms, consultants, and other financial institutions rush to create environmental, social, and governance (ESG) products, highlighting the opportunity for companies and investors to deliver financial outperformance and social and environmental impact. The ultimate win-win. 
  • Act IV: Investors and others slowly recognize that ESG investing, as currently practiced, will not likely lead to financial outperformance and is mostly unconcerned with planetary impact.
  • Act V: Reawakening to the opportunities and limits of investing to address growing social and environmental challenges.