When finance professor Aswath Damodaran declares "ESG is bullshit" at the Oslo Business Forum, it makes headlines in the Norwegian financial newspaper Finansavisen. The professor argues that there are two types of people involved in ESG: "Useful idiots who believe they are making the world a better place, and those who only want to make money from it." We probably fall into both categories.
As we understand Damodaran's message, his criticism centers on the idea that ESG was initially labeled as a measure of goodness, then of risk, and now as a transparency tool. He concludes that ESG cannot be used to determine a company's value. We agree with the professor that ESG is a poor indicator of short-term returns. If you aim to make quick money, investing in oil might be a reasonable choice right now.
However, for investors with a longer perspective, sustainable investments are impossible to ignore. It's not about goodness but about those who want long-term success offering products and services that are good for the world. This drives long-term demand and value creation. Investors with a long-term view have already embraced this idea.
Just a week and a half ago, Citizen Financial announced a goal of $50 billion in sustainable investments by 2030. And here in Norway, the head of the Norges Bank Investment Management (The Norwegian Oil Fund), the CEO Nicolai Tangen , points out that companies with clear sustainability goals reduce their emissions, while the opposite is true for those without such goals.
With international commitments to cut emissions in the coming decades, not adhering to ESG will come at a cost.
Consultants and sustainability reports won't save us from the climate crisis, but it's impossible to ignore the widespread agreement that ESG is the framework to hold those with the most influence on the future accountable. So, regarding the tool of transparency, we agree with the professor. It's also a fact that not all sustainability reporting is equal.
More transparency and better data will help separate the wheat from the chaff. We must also understand that measuring emissions alone won't cut them, but it provides a starting point for action. Choosing measurement points and parameters raises new issues and dilemmas. These need to be addressed and discussed, not used as evidence that the ESG framework doesn't work.
We believe that Damodaran's ESG criticism should also be seen in a broader geopolitical context. The U.S. economy is vulnerable if it becomes dependent on solar panels and batteries produced in China. Nationalism is dominant, and in this context, it's not advantageous for investors to shift their focus from short-term gains to long-term, sustainable returns. Sustainability is more than just the 'E' in ESG; it's about how we care for people and communities, the climate and the environment, and the economic aspect all at once.
It's a complex overall picture that we must address, one that goes beyond metrics in an ESG report.