The Pragmatist’s Guide to ESG

Abstract

Click to increase image sizeClick to decrease image size Additional informationNotes on contributorsTodd CortTodd Cort is currently a senior lecturer in sustainability at the Yale School of Management with courtesy appointment at the Yale School of the Environment. He serves as faculty co-director for the Yale Center for Business and the Environment (CBEY) and the Yale Initiative on Sustainable Finance (YISF).Notes1 D. C. Esty and T. Cort, eds., Values at Work: Sustainable Investing and ESG Reporting (Springer Nature, 2020).2 T. Whelan, U. Atz, T. Van Holt, and C. Clark, Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015–2020 (2021), https://www.stern.nyu.edu/sites/default/files/assets/documents/ESG%20Paper%20Aug%202021.pdf.3 Bloomberg Research, https://sponsored.bloomberg.com/article/mubadala/the-future-of-esg-Investing.4 D. Gelles, “How Environmentally Conscious Investing Became a Target of Conservatives,” New York Times, 28 February 2023, updated March 1, https://www.nytimes.com/2023/02/28/climate/esg-climate-backlash.html; J. Sommer, “On Wall St., ‘Socially Responsible’ Is Common Sense. In Congress, It’s Political,” New York Times, 4 March 2023, https://www.nytimes.com/2023/03/04/business/esg-socially-responsible-investing.html.5 G. Baker, “The Rising Backlash Against ESG Investing,” Wall Street Journal Opinion, 8 March 2023, https://www.wsj.com/podcasts/opinion-free-expression/the-rising-backlash-against-esg-investing/633ad782-974f-495b-955d-a7c62a0fd8a3.6 J. Ullrich and F. Powell, “What Is an ESG Score for Investing?,” USA Today, 1 March 2023, https://www.usatoday.com/money/blueprint/investing/what-is-esg-investing.7 L. Qiu, “No, Wokeness Did Not Cause Silicon Valley Bank’s Collapse,” New York Times, 15. March 2023, https://www.nytimes.com/2023/03/15/us/politics/silicon-valley-bank-collapse-woke-fact-check.html.8 See, for example, N. L. Erhardt, J. D. Werbel, and C. B. Shrader, “Board of Director Diversity and Firm Financial Performance,” Corporate Governance: An International Review 11, no. 2 (2003), 102–11; R. Lorenzo and M. Reeves, “How and Where Diversity Drives Financial Performance,” Harvard Business Review 30, January (2018): 1–5.9 PCBB, “Financial Institutions of All Sizes Increase DEI Efforts,” 4 August 2021, https://www.pcbb.com/bid/2021-08-04-financial-institutions-of-all-sizes-increase-dei-efforts.10 Net Zero Tracker, https://zerotracker.net (accessed 31 March 2023). Net zero commitments refer to a target of completely negating the amount of greenhouse gases produced by the companies activities through a combination of reduced emissions and sequestration of carbon from the atmosphere.11 IEA, Multiple Benefits of Energy Efficiency, IEA, Paris, 2019, https://www.iea.org/reports/multiple-benefits-of-energy-efficiency/emissions-savings, license: CC BY 4.0.12 U. Chrobak, “Solar Power Got Cheap. So Why Aren’t We Using It More?,” Popular Science, 8 October 2021, https://www.popsci.com/story/environment/cheap-renewable-energy-vs-fossil-fuels.13 For more information about the B-Corp Certification process and the organizing body B-Lab, see https://www.bcorporation.net/en-us/certification.14 The B-Lab provides a good summary of the purpose and specific legal protections offered under a benefit corporation registration: https://usca.bcorporation.net/benefit-corporation.15 “Impact investing” refers to investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return (https://www.investopedia.com/terms/i/impact-investing.asp). “Blended finance” is the strategic use of development finance (concessional capital) for the mobilization of additional finance toward sustainable development in developing countries (https://www.oecd.org/dac/financing-sustainable-development/blended-finance-principles). “Negative screening” is the process of finding and then removing companies that score poorly on environmental, social, and governance (ESG) factors relative to their peers from an investment portfolio (https://corpgov.law.harvard.edu/2022/08/08/does-esg-negative-screening-work).16 https://www.the-future-of-commerce.com/2022/10/25/greenwashing-definition-stats.17 U.S. pollination value is estimated by A. Jordan, H. M. Patch, C. M. Grozinger, and V. Khanna, “Economic Dependence and Vulnerability of United States Agricultural Sector on Insect-Mediated Pollination Service,” Environmental Science & Technology (2021), doi:10.1021/acs.est.0c04786. The value of commercial pollination services globally is reported by https://www.knowledge-sourcing.com/report/global-pollination-market.18 R. Kerber and N. Z. Hussain, “Vanguard Quits Net Zero Climate Effort Citing Need for Independence,” Reuters, 7 December 2022, https://www.reuters.com/business/sustainable-business/vanguard-quits-net-zero-climate-alliance-2022-12-07.19 Vanguard, “An Update on Vanguard’s Engagement with the Net Zero Asset Managers Initiative (NZAM),” 7 December 2021, https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/update-on-nzam-engagement.html.20 https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter.21 A. Frericks, “While He’s Re-Writing the Music, Larry Fink Won’t Change the Underlying ESG Tune,” RealClear Markets, 24 March 2023, https://www.realclearmarkets.com/articles/2023/03/24/while_hes_re-writing_the_music_larry_fink_wont_change_the_underlying_esg_tune_889211.html.22 See, for example, https://www.morningstar.co.uk/uk/news/213385/will-the-sfdr-prevent-greenwashing.aspx.23 For more information on SASB, see https://www.sasb.org.24 There are hundreds of standards on ESG and sustainability today. Some of the more common types are (1) standards for management practices and performance, such as the ISO 14001 standard for environmental management systems; (2) auditing standards for nonfinancial accounting data, such as the ISAE 3000 Auditing Standard; (3) standards for producing voluntary ESG reports, such as the Global Reporting Initiative and the Sustainability Accounting Standards Board; (4) supply chain ESG performance and management system standards, such as the SA8000 Standard for Labor Rights or the Fairtrade Standards; and (5) product performance standards, such as Energystar ratings for energy efficiency.25 A. H. McGowan, “Life in the Anthropocene,” Environment: Science and Policy for Sustainable Development 65, no. 2 (2023): 6–14, doi:10.1080/00139157.2023.2167456.