The Value of ESG: Where and Why It Matters

Abstract

Investment strategies that incorporate environmental, social, and governance (ESG) criteria have recently been questioned, especially in the United States, and cynically termed "woke capitalism." Some of this skepticism is spreading to Europe. In this Public Discussion Note on "The Value of ESG: Where and Why It Matters" Dr. Cyril Pasche, SFI Senior Director, and Prof. Zacharias Sautner, SFI Senior Chair and Professor of Sustainable Finance at the University of Zurich, argue that this criticism largely stems from a misunderstanding of what ESG investing is and how it creates financial value for investors, for example, by increasing firm valuation or reducing risk. The co-authors illustrate this point by focusing on two major ESG risks: climate and biodiversity. Both constitute financially material investment risks that institutional investors must address in the investment process. By actively managing these risks for the firms in their investment portfolios, institutional investors can not only create financial value, but also contribute to society by helping to meet the grand challenges of our times. This role is distinct from any moral or values-based judgment of ESG investing. To counter the rising ESG backlash, the co-authors stress the importance of highlighting institutional investors' role in financing the green transformation, thus preventing their vital risk management activities from being undermined by political attitudes, social values, or moral principles.