The really big picture when it comes to ESG
Corporate environmental, social and governance (ESG) efforts have gained in prominence in recent years.
Large companies have found that publishing ESG and sustainability reports make great sense from a public and investor relations point of view. Going one step farther, some are convinced that there is a correlation between ESG commitment and performance.
One old corporate governance hand writes: "The evidence is clear that corporate governance and other 'extra-financial' research can help to improve the performance of investment portfolios. That may sound like a bold statement, but to people steeped in this research, this is old news extensively chronicled in the growing literature on this subject."
Many academics have indeed suggested a correlation, though not all investors are sold on the idea. As of now, few analysts accord ESG criteria great weight in their analytics, though some institutional investors have pushed exchanges to require issuers to produce ESG reports.
So why haven't more people embraced the movement?
Here's a very big picture idea: "The resistance to ESG research also draws strength from the excessive intellectual specialisation endemic in the modern world. Adam Smith and many great thinkers of his time did not restrict their purview to a single field such as economics, politics, or social welfare. Instead they wrote about political economy, a discipline that sought to understand how individuals, companies, markets and governments can best interact for the good of society. We lost this holistic perspective with the development of modern financial theory after the second world war."
That's grand, and perhaps a bit over the top, but the point is interesting. The industry does tend to be wedded to traditional forms of research, accepting change only over time. At some point, the link between performance and other brand strength indicators will hopefully become so compelling that investors will be forced to take note. -Jim