Although environmental, social, and governance investing has become increasingly fashionable, it has not lived up to its promise. Activists and advocates have tried to change the basic logic of financial investment and corporate governance when they should be focusing on ways to harness it.<\/p>\n<\/div>\n
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PARIS \u2013 Environmental, social, and governance (ESG) standards are the talk of the investment world these days. But despite the trillions of dollars of investments that have been labeled \u201cESG,\u201d this form of investing has yet to have much real-world impact.<\/p>\n
This is especially true on the environmental front (though such investments\u2019 social impact has not been much more evident). Investor coalitions to combat climate change have exploded onto the scene, promising to steer a massive amount of capital toward \u201cgreen\u201d businesses and industries. At last year\u2019s United Nations Climate Change Conference (COP26), private financial institutions pledged to mobilize\u00a0$130 trillion\u00a0\u2013 a figure greater than global GDP \u2013 for clean energy. And yet, the climate outlook is only worsening. Last month\u2019s\u00a0report\u00a0from the Intergovernmental Panel on Climate Change\u00a0offered\u00a0\u201cthe bleakest warning yet\u201d about what awaits humanity on a rapidly warming planet.<\/p>\n
Welcome to the world of greenwashing: Though firms\u2019 owners have committed to cutting carbon dioxide emissions, they have not actually ordered firms\u2019 managers to do so. But, instead of blaming investors or companies, ESG activists should consider why there is such a large, persistent gap between public commitments and action. Simply put, climate advocates have failed to persuade investors and firms to act because they have failed to understand what ultimately drives business.