I recently stumbled upon a study conducted by the University of Copenhagen, titled “Rich and Responsible: Is ESG a Luxury Good?” Personally, I cannot comment on the methodology, statistical significance, or potential extrapolation of the results beyond Scandinavia, but it did get me thinking.
To sum up, the study explored the notion that wealthy individuals are more likely to invest in ESG in cases of windfall wealth rather than as part of their main investment strategy.
Interestingly enough, Stanford Business's Rock Center for Corporate Governance also covered the topic, albeit from a slightly different perspective. They argue that most investors still see ESG as a net cost rather than a net contributor to financial performance.
I know that ESG is problematic. A recent article by The Wall Street Journal called it “THE LATEST DIRTY WORD IN CORPORATE AMERICA.” I find this assessment sensationalized, but not entirely without merit. ESG started off as the poster child for a vaguely defined sentiment of “we stand for everything good and against anything bad,” and it has somewhat fallen from grace. We might retire the term, but we can not abandon its core ideas. Therefore, I use this term for the sake of efficiency.
Having said all that, I imagine a scale of investment needs, akin to the Maslow hierarchy of universal human needs, and I ask myself—where is ESG positioned? Drawing inspiration from the classical hierarchy of needs, I propose my own interpretation:
Wealth Preservation: In the context of considerable family wealth, preservation, risk management, asset protection, and legacy planning are a basic “need.”
Growth and Diversification: Conservative, steady growth is achieved through low-risk, long-term investments that sustain and increase wealth while minimizing exposure to volatility.
Exclusive Opportunities and Beyond: The focus shifts to exclusive investments that offer potentially higher returns and access to innovative or lucrative opportunities beyond traditional markets.
Impact Investing and Venture Philanthropy: Combining financial returns with positive social or environmental outcomes, aligning wealth with values, and driving change while achieving moderate returns. This is where ESG, green stocks, and other forms of impact investing are currently positioned.
True Altruism and Selfless Giving: This final level represents a commitment to give back for the benefit of society, with no expected returns or recognition.
In many instances, ESG investments are still seen as aspirational and somewhat detached from returns—as an add-on one can ignore, closer to philanthropy rather than a key element of a balanced portfolio, and this needs to change.
“You can be anti-ESG, It’s hard to be anti-responsibility.” Daryl Brewster, CEO of Chief Executives for Corporate Purpose.
The elephant in the room is evidently greenwashing. Skeptics, whose opinions I often share, argue that the metrics behind ESG scores are far from transparent or standardized, leading to a system where minimal actions can yield undeserved recognition and interested parties can unscrupulously skew assessments in their favor. Ultimately, we do not have uncontestable empirical data to measure ESG implementation and performance. In fact, we don’t even have a consensus on what to measure and how.
Take, for instance, a certain fast-food chain earning ESG points for introducing separate recycling bins in its restaurants—a policy that should be standard practice, not something rewarded as a cutting-edge sustainability improvement. This highlights a flaw in the current ESG framework, where companies are incentivized to implement basic environmental policies to achieve positive ESG ratings rather than address deeper, more systemic issues. This fuzziness in scoring, driven by subjective judgment and a lack of consistency across rating agencies, has created an environment where greenwashing can thrive—promoting checkbox compliance rather than meaningful, long-term sustainability efforts.
It is also worth mentioning that the skepticism around ESG is partially driven by a lack of consensus across various markets. The US is currently handling litigation involving private companies that challenge laws mandating compulsory disclosure and reporting, while the EU has rushed to adopt new regulations, as it often does. The US, predictably, relies on the voluntary participation of private companies, and its retraction from the Paris Agreement in 2017, along with allowing each state to implement policies (if any) as they see fit, has only compounded these differences.
Fears that the new ESG legal framework will burden businesses are, of course, not unfounded. EU companies trying to operate in the US are already facing challenges due to these inconsistencies in legislation (and attitude). Loss aversion related to ESG rules only heightens in times of economic hardship, which we are undoubtedly experiencing today. Ultimately, ESG is an umbrella covering more granular laws and rules that companies must abide by. We have mostly agreed on the "why," we are working on the "what," while the "how" will be decided in boardrooms behind closed doors.
All these factors gradually chip away at the overall trust in impact investing and ultimately prevent it from shifting down towards the base of the hierarchy. The crux of the matter is—ESG is not about being good or patting ourselves on the back for investing in companies perceived as virtuous. Instead, it must be about being a sensible investor. ESG must break free from its luxury or nice-to-have status, and the principles behind it must be embedded at the very base of investment needs.
We no longer have the luxury of relying on goodwill, crossing our fingers, and hoping for the best.