Why does the term ESG create a problem for so many?

The permanent temptation of life is to confuse dreams with reality. The permanent defeat of life comes when dreams are surrendered to reality.

– James A. Michener

So, what happened? How did ESG suddenly become so controversial – a call to arms for many just a few years ago, the world was rallying around environmental social and governance efforts in a way that was exciting and with hope.

Suddenly just the mention of ESG has caused a political firestorm and severely threatens progress. The state of concern has risen to a point where many companies are deliberately “Green Hushing” or underreporting their sustainable practices.

This edition of the Socially Inspired Investor digest will look at this pivotal moment to understand how we can get past this roadblock; why it is a legitimate concern for some, and if ESG is flawed, what is the more practical term or approach?

Please join us with this issue and the companion Podcast featuring Michael Poisson, Managing Director at Ideal Ratings. We hope you enjoy it as much as we enjoy creating this for you.

Why does the term ESG create a problem for so many?

We reached out to leading experts in SRI to find out their responses, and this is what we found…

QUESTIONWhy does the term ESG create a problem for so many?

ANSWERMichael Poisson, Managing Director – Ideal Ratings

ANSWERFear. When it comes to the term ESG, people may fear it for a variety of reasons that are often rooted in their own beliefs, values, or concerns. For some it’s simply their uncertainty or lack of familiarity of just what ESG is, for others, there is a perception of overreach or intrusion into their personal values or freedoms,  while some are skeptical of the impact or effectiveness of addressing ESG issues for others it is simply a threat to their political or ideological differences.

ANSWERIt’s important to acknowledge that fear or skepticism surrounding ESG is not uniform, and individuals’ concerns can vary widely. Engaging in open dialogue, providing accurate information, and addressing these concerns can help foster a better understanding of ESG and its potential benefits.

QUESTIONWhy does the term ESG create a problem for so many?

ANSWERCharles Hamowy, CPA/PFS, CFP®, Editor In Chief – The Socially Inspired Investor

ANSWEROne of the main criticisms of ESG investing is that it is too focused on social and environmental issues and not enough on financial performance. Some investors argue that companies that prioritize ESG factors may be sacrificing financial returns in order to meet social and environmental goals. This can be particularly problematic for investors who are primarily focused on maximizing their returns and may not be as concerned with social or environmental issues.

ANSWERAnother reason why some people are mad at ESG is that they believe it is too subjective. ESG ratings are often based on a variety of factors, including a company’s environmental impact, labor practices, and corporate governance. However, different ESG rating agencies may use different criteria to evaluate companies, which can lead to inconsistencies in ratings. This can make it difficult for investors to compare companies and make informed investment decisions.

ANSWERFinally, some people are mad at ESG because they believe it is too politically motivated. ESG investing often involves taking a stance on social and environmental issues, which can be controversial. For example, some investors may choose to divest from companies that are involved in the fossil fuel industry or that have poor labor practices. However, this can be seen as a political statement rather than a financial decision, which can be off-putting to some investors.