The largest mainstream institutional investors and the rating agencies that serve them now say they consider high quality Environmental, Social, and Governance (“ESG”) practices by corporations to be necessary for sustainable, long-term wealth creation—a position that has generated academic and political controversy. But for all the debate surrounding the use of ESG for investing, virtually no attention has been paid to a core tension in the ESG policies of major investors and rating agencies — the discordance of the “G” from the “E” and “S.”
It’s Time to Focus on the “G” in ESG
Too often, investors’ governance policies are in tension with their environmental and social ones.
November 18, 2022
Juan Moyano/Stocksy
Summary.
For all the debate surrounding the use of ESG for investing, virtually no attention has been paid to a core tension in the ESG policies of major investors and rating agencies — the discordance of the “G” from the “E” and “S.” At shareholder meetings, major investors have promoted stockholder primacy by making companies more open to the market for corporate control, by forcing changes in policy at the instance of a momentary stockholder majority, and by aligning company management’s pay to only one constituency — stockholders — by tying it tightly to total stock return. These are not the fundamentals of long-term “sustainable” management. Investors must address this discordance by amending their activities at shareholder annual meetings.