ESGs for the Economy & the Environment

Environmental, social, and governance criteria are beginning to play a larger role in the investment world by enabling investors to evaluate companies based on scores given in each category. As the world moves towards a more sustainable future, smarter investments guided by sustainable thoughts and calculations will be imperative not only to the health of the planet but also to the safety of the precious dollars that companies have to invest. How can environmental change be implemented in the cutthroat, greed-filled, and, in many ways, anti-environmental society that we are living in? ESGs are not going to be the answer, nor is any single idea, but incremental implementation of environmentally sustainable ideas and technology will be. Progress will only be made if all aspects of our lives are swayed slightly towards sustainability. ESG investment planning attacks a very central aspect of our callous way of life and business. In a way, reforming aspects of capitalism as we see it today needs to take place. No, we do not need to surrender control of trade and industry to the government, or become one with mother nature and live amongst the trees, but a shift in our investment strategy and focus needs to take place. While some already see the inevitability of an environmentally minded society, some do not. Asthis mentality spreads, future profits will lie within the confines of ESG and ideally, a more rigorous set of criteria. Nikola Corporation, a motor vehicle company, has been working to produce zero-emission motor vehicles since 2016 and is still in the process of perfecting Hydrogen Fueling Technologies. This technology converts electricity into hydrogen via electrolysis. The hydrogen then fuels the hydrogen fuel cell within the vehicle. Not only will the vehicle be releasing zero emissions, but it will also be able to travel greater distances than a gas-powered vehicle. (Nikola Energy 2021).

 “Nikola’s goal is “to revolutionize the economic and environmental impact of commerce as we know it today.” It’s a lofty ambition, and one shared by a growing number of entrepreneurs, business leaders, and investors hoping to reform capitalism from the inside — to make companies more sustainable, inclusive, and socially responsible.” (O’Leary and Valdmanis 2021) Yes, a lofty goal for sure, but it has begun and will continue to gain traction. For example, the Business Roundtable, which consists of CEOs of many major companies, altered its Statement of the Purpose of a Corporation. It now states that the economy should be used to serve all Americans. Bill McNabb, former CEO of Vanguard, says, “By taking a broader, more complete view of corporate purpose, boards can focus on creating long-term value, better serving everyone – investors, employees, communities, suppliers, and customers,” (Business Roundtable 2019). While this does not explicitly state a movement towards environmental sustainability and leans more on the social leg of ESG, all facets of ESG will be one with the environment as we continue to push into crunch time on our environmental goals and obligations. Mcnabb speaks about the importance of fostering “long-term value” in a corporation. If we wish to achieve any kind of “long-term value,” environmental awareness and activism are going to be a necessity in any and all corporations; hence the merging of all ESG criteria to be environmentally aware. The Paris Climate Agreement, which the US has just recently rejoined following the inauguration of President Biden, looks to achieve a substantially less than 2 degrees celsius rise above pre-industrial levels by the end of the century. Currently, we are in a very tight spot with regard to this target.

 According to Vivian Sorab of the Yale Environmental Review, models and research have brought a more concrete time frame to the table. “Assuming a moderate mitigation strategy, a 2 degree warming threshold, and accepting a 67% likelihood of remaining below the threshold, the Point of No Return will arrive in the year 2035. If the removal of greenhouse gases from the atmosphere is strong, the Point of No Return gets delayed to 2042. With the same assumptions but a 1.5 degree warming threshold, the Point of No Return has already passed. Greenhouse gas removal, if implemented immediately, might push the Point of No Return to 2026. For a more aggressive (fast) mitigation strategy, the Points of No Return, assuming no greenhouse gases are removed from the atmosphere, will arrive in 2027 and 2045 respectively for the 1.5 degree and 2 degree targets.”

 To give ourselves the best shot at solving this problem, all facets of society need to implement environmentally sustainable practices. Technology needs to be developed and incorporated in all aspects of our lives; namely, transportation, electricity production, and industrious emissions need to be cut. Technology is going to be key in achieving a sustainable way of life, but to force corporations’ hands, ESGs are an effective stimulus. Corporations that meet ESG criteria, likely through the implementation of new technology, will be more attractive to investors because environmentally minded companies will have more long term value. But a substantial effort from the branch of society that is in possession of the most capital and therefore power--banks, investment firms, and large corporations--is also going to be necessary to make strides towards sustainability. ESG is going to and is already beginning to play an important role in this endeavor.

 While to many the Paris Climate Agreement, ESG, and environmentally sustainable shifts in society are seen as damaging to the economy, this could not be more wrong. Companies that are directly tied to damaging practices may take some hits, but where there is a loss in one area, there is growth in another. Some investors also see the ESG movement in a similarly negative way; they believe that they will have to surrender some of their returns to remain within the ESG investment criteria, but again, this is wrong. According to Smith of Haverford Trust Company, “There’s a misconception out there that you need to be willing to give up returns in order to invest responsibly but a growing body of research shows that ESG actually helps mitigate risk”(Curry and Napoletano 2021). The mitigation of risk comes directly from the inevitable demand for sustainability in the near future.

People are already seeing profitable scenarios as they move towards ESG, and they will only continue along with this trend as the environmental obligations we have grow more pressing. Again, this is not going to solve our climate issues alone, but by infiltrating this sector of our society with environmentally responsible practices, it is inevitable that more practices in all fields and sectors will follow.

Sources

Business Roundtable . 2019 “Business Roundtable Redefines the Purpose of a Corporation to Promote 'An Economy That Serves All Americans'.” Business Roundtable. August 19, 2019. https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.  

Napoletano. 2021. “Environmental, Social And Governance: What Is ESG Investing?” Forbes. March 12, 2021. https://www.forbes.com/advisor/investing/esg-investing/.

O'Leary, Valdmanis. 2021. “An ESG Reckoning Is Coming.” Harvard Business Review. March 4, 2021. https://hbr.org/2021/03/an-esg-reckoning-is-coming. 

Sorab. 2019. “Too Little, Too Late? Carbon Emissions and the Point of No Return.” Yale Environment Review. March 26, 2019. https://environment-review.yale.edu/too-little-too-late-carbon-emissions-and-point-no-return.