Some experts believe these measurements are not far off. Kamran Kahn, Deutsche Bank Corporate Bank’s Head of ESG in Asia says that the point of ESG’s arrival in financial service, will be “when it gets treated in the same way as any other asset class and performs as well as others”. Kahn, who has led investments in sustainable development, says this will be at the exact moment when stocks trade in the secondary market based on the quality and the economics – and when the value of that instrument and the quality of the data impacts the price (and performance) of that asset.
Driving this measurement momentum, says fund manager DWS’s Head of ESG Thematic Research Michael Lewis, is the increasing acceptance that we’re in a stakeholder economy. In Stakeholders and shareholders1, he explains why economist Milton Friedman got it wrong in his September 1970 essay for the New York Times when he wrote that “The social responsibility of business is to increase its profits2. Instead he argues that given the Covid-19 pandemic’s impact on all sectors of the economy and society, companies’ responsibilities extend beyond the shareholder to the stakeholder.
Recent decades have added weight to his argument. Battered by accounting scandals, incidents of negligence related to oil spills and toxic chemical releases, corporates seized the opportunity to win back stakeholder trust by integrating ESG into non-financial reporting statements.
This stakeholder economy has enabled corporates to show investors they are doing more than just making profits, says Lewis, and provide the data points for determining that an ESG stock will do just as well, if not better than any other. The idea is that a company’s operations that bare risk to stakeholders could impact negatively on return, while stocks based on operations that are stakeholder friendly and risk-sensitive should perform well.
This article looks at how investors are assimilating these measurements, transforming ESG investing from a soft skill into a science for determining performance. It also considers the role of companies’ operations and the way they are financed in combatting greenwashing (filing disclosures related to sustainability as a PR exercise).