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Date: 2023-12-08 Page is: DBtxt003.php L0700-MR-ESG
Environmental, Social and Governance

TPB/TVM commentary: As regards the use of ESG as an indicator of performance, the questions must be asked 'What performance?. I attended a PRI workshop at Bloomberg in New York in 2012 which took pains to show that companies that had good ESG indicators were exhibiting higher 'alpha' than companies that ignored ESD. The problem with this is that the dominant metric was still alpha, in other words the goal was still to earn as much investor wealth as possible.

What this means is that it is still going to be impossible for conventional financial investment to flow into environmental programs of social prograns that have environmental or social impact without them also being profitable.
TPB history: In the 1980s I did a lot of work for the World Bank and the UN including work related to the drought emergency in the Horn of Africa and the Sahel. Millions of people died simply because there was not enough water. The technology to solve the problem was easy ... pumps and pipes ... but the money needed to make that happen could not be deployed. The money could not be mobilized because solving problems for poor people is not profitable using conventional thinking about investment.
What is needed is an acceptance of social progress as a goal in itself, and the acceptance of environmental progress as a goal in itself ... just as there is an acceptance of financial wealth accumulation as an end in itself.

This can be done, but there are some essential prerequisites.

There need to be better measures for social and environmental progress than have been the norm in the past. The systems for measurement have to be low cost and reliable. To the extent that correlations are used, they must be strong correlations based on science. For example the idea of CO2 equivalent when considering the impact of other greenhouse gases.

From Wikipedia:

According to Wikipedia, ESG ... Environmental, social and corporate governance ... refers to the three central factors in measuring the sustainability and ethical impact of an investment in a company or business.

... In the early years of the new millennium, the major part of the investment market still accepted the historical assumption that ethically directed investments were by their nature likely to reduce financial return. Philanthropy was not known to be a highly profitable business and Milton Friedman had provided a widely accepted academic basis for the argument that the costs of behaving in an ethically responsible manner would outweigh the benefits. ...

... In 2005, however, a quantum leap was taken in the integration of ESG considerations into the mainstream investment market. The United Nations Environment Programme (UNEP) Finance Initiative commissioned a report from the international law firm Freshfields Bruckhaus Deringer on the interpretation of the law with respect to investors and ESG issues. The conclusions of the report were startling. Freshfields concluded that not only was it permissible for investment companies to integrate ESG issues into investment analysis but it was arguably part of their fiduciary duty to do so.[10][11] In 2014, the Law Commission (England and Wales) confirmed that there was no bar on pension trustees and others from taking account of ESG factors when making investment decisions.[12] ...,_social_and_corporate_governance Open external link
ESG standards Wider adoption of responsible investing principles is unlikely to send investors crowding into the same high quality assets because ESG is not standardised, according to Taie Wang, deputy head of research for global equity beta solutions at State Street Global Advisor Asia.... As of August 2018, globally there were about 270 sustainable index funds and exchange-traded funds with an aggregate assets of $102bn, according to Morningstar data. Open #15474

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