Stocktake: ESG investing a ‘feel-good scam’, says finance professor

ESG measurement services like Sustainalytics missed the ‘Russia effect’

“A feel-good scam that is enriching consultants, measurement services and fund managers, while doing close to nothing for the businesses and investors it claims to help, and even less for society.”

Acclaimed valuation expert and New York University finance professor Aswath Damodaran is not a fan of ESG (environmental, social, and governance) investing. Damodaran tore into ESG in a lengthy blog post last week, arguing the recent corporate exodus from Russia is not evidence of ESG's merits.

Firstly, ESG measurement services like Sustainalytics missed the "Russia effect", says Damodaran, with Russian companies like Sberbank, Lukoil and Yandex all ranked in the top quartile of their industry groups prior to the Ukrainian invasion.

Secondly, most companies pulling out of Russia had little business there anyway, as Russia only accounts for 2 per cent of the global economy.

Besides, investing in Russia is risky for multiple reasons; it’s easy to pick the moral path “when economics and morality converge”.

Would corporations and investment funds be as quick to exit China if it invaded Taiwan? Damodaran doesn’t answer his own question, but he clearly doesn’t buy into the idea there has been a “moral awakening” at companies.

Nor does he think ESG should keep expanding to include geopolitical risk and other variables. “If ESG tries to measure everything,” he says, “it ends up measuring and meaning nothing.”

And he’s not optimistic about a crackdown on greenwashing. The largest companies can simply use their resources to game the system better, exacerbating biases that already exist in the ESG scoring system.

Damodaran says the industry will ultimately be occupied by two types – well-meaning but misguided “useful idiots”, and “feckless knaves” who see an opportunity to profit.

These are not “edifying choices”, says Damodaran, “but I don’t see any good ones, other than leaving the space completely”.

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