Friday, February 09, 2024

Green investing may not (or may) be the most environmental way forward

Here's an interesting conundrum: a new study suggests that ESG investing may not be doing as much overall good as it was once thought, and may even be counterproductive.

Putting money into companies with positive environmental, social and governance characteristics is supposed to help "save the world" by divesting in the least sustainable ("brown") companies in favour of more sustainable ("green") companies. The idea is that depriving brown companies of money pushes their cost of capital up, and this should encourage them to become greener.

At first blush, that makes a lot of sense. This report, though, suggests that unintended consequences may follow. This is because, it argues, companies that are already green have a limited scope for further improvement, while increasing the cost of capital for brown firms may actually lead them to lean even further into their existing high-pollution operations and even cut more corners on pollution controls. Thus, it may be making brown firms browner without making green firms greener.

The report suggests a better strategy may be what it calls "tilting": investing in brown firms that are at least taking some corrective action (what you might call "greenish-brown" companies) in order to encourage them to extend their corrections still further.

Well, maybe. I think there may be some flaws in this logic, though. While a green insurance company or IT firm may be hard-pressed to improve their green credentials still further, increased investment in renewable energy or cleantech companies WILL allow them to raise their output and increase the total amount of good in the world. 

It seems to me that there are different kinds, and different levels, of greenness, and to lump these all together may not be wise. It's a bit like making the decision to buy a hybrid car over a full electric vehicle.

Plus, investment in greenish-brown firms may not have the stated desired results, particularly if they don't know why people are investing in and supporting them. Are investors approving of the brown side or the green side of their operations? Should we be investing in an oil company that continues to pollute the world while paying lip-servive to ESG by putting some small sums into carbon capture technology?

I'm sure the report came from a good place. I'm less sure that it's taking us to a good place.

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