"A broken idea," declared The Economist’s special report last month on ESG investing. But it’s an idea that, despite its pitfalls, "may be better to overhaul than to bin." 

Many people with an interest in the state of ESG investing are on board with this sentiment. That said, the spectrum of criticism is as wide as motivations are mixed. For Elon Musk, ESG is the "devil incarnate." For Securities and Exchange Commissioner Hester Peirce, the ethos behind ESG is akin to "shunning wrapped in moral rhetoric, preached with cold-hearted, self-righteous oblivion to the consequences."

For many more, it’s a necessary, although imperfect, means of guiding capital markets toward long-term value creation on an increasingly risk-laden planet. 

ESG’s expansion over the past few years has felt a bit like a game of telephone. If you’ve ever played telephone, you may recall that the final participant in the circuit who shares what they have heard usually offers an interpretation that is incorrect, hyperbolic and pretty entertaining. But with trillions of invested dollars and climate breakdown on the line, ESG telephone is a dangerous game. 

Single materiality is a particularly potent, and often misunderstood, element fueling the furor over what ESG data for investment decision-making is meant to accomplish. In the game of telephone, the conflation of ESG with sustainability has put ESG in the midst of an awkward game of tug-of-war, with commercial and existential incentives as the primary pullers. 

On the commercial end, asset managers are gripping on tight to the juicy management fees that ESG funds have afforded them in the highly fee-compressed investment industry. On the existential end, the ESG boom and all that it has promised are seen as a distraction from pressing for change on policymakers and market referees.

Changing the narrative will require a lot of hard truth telling. Scholars will need to be clear and accurate about what ESG can and cannot do.

A reasonable, but telephone-corrupted, question sits at the center of all this: What, then, is ESG meant to do?

I get to speak with a lot of veterans in the space, and many of them are more than a little frustrated about how much ado has been made about a question that has, and still has, a pretty clear answer. For example, when Bloomberg published its "ESG Mirage" piece late last year demonstrating how ESG ratings measure the world’s impact on a company and not the other way around, it was odd to see that information received as so revelatory. 

But as Ken Pucker, former Timberland COO and current lecturer at Tufts University, aptly captured in a recent Harvard Business Review piece, "It’s hard to blame casual observers for believing that investing in an ESG investment fund is helping to save the planet." Good marketers successfully bring products to market, and their participation in the telephone game has produced highly successful short-term results for ESG investment products. 

Unfortunately, this success measured in fund fees is coming at the expense of ESG investing’s longer-term credibility and efficacy. 

Andrew King, chair of the Questrom School of Business at Boston University, and Pucker have served as leading voices questioning the integrity of the ESG edifice that’s been built. Or, as the Economist described it, an "amalgam of three words … which sound more like a pious mantra than a force for change." 

Thanks for reading, and I hope you enjoy our exchange below.

Grant Harrison: You both recently wrote, "The boom in ESG investing helps to create the impression that the trillions of dollars needed to finance the transformation to a low- carbon economy are on the way" — a misconception stemming from a neoliberal narrative that has overwhelmed economic and political life. If the hyperbolizing of ESG investing as a climate solution is an outcome of this narrative, how do you see us successfully undoing it? 

Andrew King: Ending the hyperbolizing of ESG is a good place to start. In fact, we don’t see it as an "outcome" of a neoliberal narrative (to use your phrase), we see it as a key driver of a range of beliefs that solidify power and defer needed change. ESG investing is like a comforting fairytale that allows you to drift off to sleep. Why worry when you are being told that your 401(k) can beat the market while solving for climate change?

Changing the narrative will require a lot of hard truth-telling. Scholars will need to be clear and accurate about what ESG can and cannot do. Many scholars are afraid to speak out, but some are taking tough stances.  

Harrison: Earlier this year I talked with BlackRock’s portfolio manager for the firm’s Climate Finance Partnership, which aims to accelerate the flow of capital into climate-related investments in emerging markets. Can you share more about the type of public-private partnerships you see as necessary to deliver us a successful, and just, low-carbon transition?

Ken Pucker: Levi’s is one of the 200-plus fashion companies that has signed up to science-based targets. To deliver on their commitment, they need to decarbonize the operations of their Tier 2 and Tier 3 suppliers. To that end, they have established a partnership with the International Finance Corporation that offers lower interest rates to suppliers that demonstrate progress in reducing greenhouse gas usage and improving water efficiency in keeping with Levi’s goals.

Almost 25 years after the issuance of the first sustainability reports, it seems reasonable to require public companies to measure and report on their carbon emissions.

In addition, many of the provisions of the Inflation Reduction Act, such as subsidies for solar, EV and heat pumps and support for climate-smart agriculture and reforestation, will accelerate funding to climate tech startups and established companies committed to decarbonization. 

Harrison: The sustainable finance community has put a lot of stock into the SEC’s proposed rules on climate disclosure and ESG investing. Someone shared a comment letter with me from Stanford’s Sustainable Finance Initiative, a group with "decades of experience advising finance ministers, governors, chief investment officers and executives in the asset management industry." A reputable group like this asserting that "Scope 3 disclosure should remain voluntary" makes me scratch my head. Does it do the same for you? If so, let us into your thinking. And if not, why not? 

Pucker: Almost 25 years after the issuance of the first sustainability reports, it seems reasonable to require public companies to measure and report on their carbon emissions. During this period, when reporting has been voluntary and not comparable, CO2 emissions have grown almost 50 percent.  

That said, two important notes. Increasingly dispersed and outsourced global supply chains summed with ever faster product churn make precise measurement of Scope 3 emissions a real challenge. Perhaps mandating measurement will accelerate investment in tools to better enable this process. Next, it is important to differentiate between disclosure and action. Absent other measures to internalize externalities, measurement and reporting of CO2 will not likely have a big impact.

King: I think you need to use a price mechanism. I think you need to tax carbon at its use or at the border. Then the price carries the information needed to make good choices.

Harrison: I recently asked Harvard Business School’s George Serafeim a similar question, so I’ve offered a slightly tweaked version here: Imagine you’re hired for the fictitious and absolutely overwhelming role of ESG Czar overseeing the world’s 10 largest asset managers. It’s a one-year contract. What’s on your near-term and longer term agenda, and what are you doing to get it done?

Pucker: We do not think that the asset management industry (alone) is the best place to focus.  No matter the intervention, they will continue to act as fiduciaries and chase returns. Instead, were we able to be czar for a day, we would change the rules of the system. More specifically, as relates just to this country [the U.S.], we would ban corporate funding of any political activities or candidates, and we would build on the advances of the Inflation Reduction Act to make fossil fuels uncompetitive with renewable alternatives.  

King:I agree mostly, although I would rather have a carbon tax. I am very worried that business is being swept into the political divide. We don’t want business to make decisions based on politics. We want them to do what is efficient. Merging state and corporate power can be dangerous. See Mussolini’s Italy.

 Do you see what I have to deal with?

Harrison: Going back to your recent piece in the Harvard Business Review, you quoted Oxford’s Bob Eccles saying that "we would be better off if ESG investing would just go poof." If ESG investing went poof, how would we most constructively pick up the pieces, and what would we build? 

Pucker: Many of the tools that have been developed as part of the ESG acceleration are useful and should be incorporated into fundamental risk assessment and investing. For example, it makes sense for investors to use a framework such as [the one recommended by the Task Force on Climate-related Financial Disclosures] to map scenarios for climate change to assess risk. It also is smart for investors to analyze a company’s preparedness for regulation and its plans to innovate to decarbonize to better address shifting customer and consumer preference. That said, these analyses ought not be branded as ESG or something special. They should be the norm for traditional 21st century investing.

King: I trust Ken on this.