Leading London business academic Alex Edmans has called for the term “ESG” to be “scrapped”, writing that it has “had its time and place”.
Writing for the Wall Street Journal, Edmans, professor of finance at London Business School, says: “Just as painting by numbers is useful for a child learning to paint but limiting thereafter, the current ESG-by-numbers approach has long outlived its purpose.
“Let’s scrap the politicised, simplistic and restrictive term of ESG and free companies to create long-term value.” He adds that the “infatuation with ESG has now gone too far”.
The call comes at a time when “ESG” had faced increasing criticism and when it has become highly politicised in the US, where right-wing activists have claimed it is part of a “woke” approach to governance when companies should be solely focused on financial growth.
Edmans’ argument is that placing ESG on a pedestal can be damaging in three ways: it narrows the focus of company managers and can turn ESG factors into a “compliance exercise”; it “blurs” company focus, making it difficult to distinguish between issues under the ESG heading; and ESG is confusing, leaving companies believing it “defies the laws of economics”.
Edmans also aims his fire at ESG critics, claiming they fail to see some ESG issues are valuable and a “boost” to returns.
“It’s ironic,” writes Edmans, “that some of the harshest opponents of ESG claim that companies’ only purpose is to improve financial performance, when some ESG issues help with exactly that.”
Ideological v logical
He argues that if the externalities created by companies are so pressing, they should be dealt with through regulation and government policy and adds that the politicisation of ESG has triggered ideological reactions, “rather than logical evaluations”.
Edmans is not alone in believing ESG has become problematic. The Wall Street Journal has run many critical editorials while Larry Fink , chief executive of BlackRock, the world’s biggest fund manager, recently said he would stop using the term because it had become “weaponised” by both sides of the political divide.
Presidential hopeful Vivek Ramaswamy has, in part, built his reputation on running anti-ESG investment funds and writing a book slating “woke capitalism”. Observers believe many companies have toned down their use of the term to avoid being targeted by “anti-woke” activists.
Elsewhere, Stern School of Business professor Alison Taylor believes the issues underlying the term ESG are “here to stay”. She writes “renaming ESG as a ‘material risk’ is unlikely to get rid of the controversy and politicisation either”.
It’s evident that ESG has become a toxic term in some circles, though the number of consultancies still willing to use it in their service provision suggests it still has some currency.
But an intervention from Edmans in a title as august as the Wall Street Journal signals that the term may be losing its sheen. All ideas evolve over time, some even become extinct. “ESG” may be moving to a new phase.