The Corner

Economy & Business

ESG: Expanding the Definition

One of the advantages of the term “socially responsible” investing for those who promote it is its almost infinite flexibility. Even when this principle is given somewhat more structure by defining it as meaning that a company will be judged by the extent that it matches up to certain environmental (“E”), social (“S”) and, less controversially, governance (“G”) criteria, E, S and G can be defined in (almost) any way that those pushing a particular agenda or, for that matter, a product would like.

CNBC:

Companies’ responses to their communities in light of nationwide protests over the death of George Floyd will be noted in S&P’s scoring system for its ESG index, its manager told CNBC’s “ETF Edge” on Monday.

Mona Naqvi, head of ESG product strategy at S&P Dow Jones Indices, runs the S&P 500 ESG Index, a basket of S&P stocks that rank highly for their environmental, social and governance values. The index is modestly outperforming year to date, down 4% versus the S&P’s 5% decline.

“We do take into account things like how companies are behaving with respect to their raw stakeholders,” Naqvi said. “So, not just their employees and their shareholders, but how do they interact with their broader community, which is really important in terms of building good will in times of stress like this.”

“It’s also important through ESG to take into account things like diversity,” she said. “How does a company actually hire? What are its hiring practices? Is it diverse throughout its broader business operations? And I think these are all the types of issues that these protests are demonstrating are very important to many people that ESG can help capture.”

Ms. Naqvi is almost certainly correct that those who choose to invest in an ESG index will want to see the companies in that index react to the current wave of protests in the sorts of ways that she is suggesting. It’s thus perfectly reasonable for S&P to reflect that in its scoring.

It is also easy to see how other ESG investors will take the same approach.

The problem however comes with ‘captive’ investors (such as employees in pension funds where ESG is a key determinant in investment strategy) or in the cases where companies are, one way or another, ‘coerced’ into falling into line. In that case, the element of choice is — or can be — eliminated. I wrote a bit about this here.

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