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A finance professor proposes changing ESG to rational sustainability

By Saijel Kishan

In the midst of continuous scrutiny surrounding ESG (Environmental, Social, Governance) practices, a former Morgan Stanley banker turned finance professor, Alex Edmans of the London Business School, asserts that it’s time to move away from the divisive three-letter term. The term “ESG” has become so entangled in political debates that it obstructs objective and clear thinking, prompting Edmans to propose the adoption of “rational sustainability” instead. While he acknowledges its potential blandness, Edmans argues that sustainability fundamentally revolves around creating long-term value, a concept less prone to politicization.

In a paper published on January 20, Edmans emphasizes the need to return to the original objectives set by United Nations officials who initiated the environmental, social, and governance movement nearly two decades ago. “Rational sustainability” broadens the scope beyond the confines of the ESG label, considering all factors contributing to value creation. It selectively discounts ESG elements that lack material significance, grounds itself in evidence and analysis, and focuses on determining which companies genuinely embody sustainability.

Edmans asserts that “rational sustainability” serves as a safeguard against succumbing to “irrational sustainability bubbles.” The call for a shift in terminology comes at a time when US sustainable-investment funds witnessed a record outflow in 2023. ESG has faced heightened backlash from Republican politicians, particularly those aligned with the fossil fuel industry. Even BlackRock Inc. CEO Larry Fink, once a vocal advocate of ESG, distanced himself from the term, citing its excessive politicization.

ESG finds itself “under attack from all sides,” according to Edmans. While initially promising with good intentions, ESG’s downfall is attributed to the naive implementation by true believers, blind opposition from adversaries, and exploitation by opportunists pursuing self-interest. Over the past decade, asset managers leveraged ESG to generate profits, and companies utilized it to attract capital and customers by highlighting their ESG credentials. However, the narrative shifted with the onset of political opposition.

Edmans outlines ten reasons supporting the adoption of “rational sustainability” in his paper, emphasizing its focus on the long term and outcomes rather than mere labels. Unlike ESG, he argues that rational sustainability centers around value creation and remains apolitical, transcending job titles, political affiliations, or age groups. Edmans, critical of how ESG funds attracted capital without justified performance, rejects the notion that considering ESG factors conflicts with fiduciary duty, deeming it illogical. In his view, assessing ESG risks aligns with fiduciary duty by ensuring investments steer clear of businesses facing potential obsolescence.

The article was originally published here.