ESG has grown rapidly over the last two decades. It has served as an innovative tool for investors and longer-term asset managers to assess risks – and also opportunities – beyond traditional financial metrics. ESG was created to help companies manage their environmental, social and governance vulnerabilities. Over time, it became equated with sustainability.
However, the assumption that the three elements can be evaluated using a single compound rating system is flawed. This is simply not feasible, and persisting to do so only generates confusion. A single-rating ESG measurement underplays the fact that the three components are each systemic, very different and interdependent. One core challenge is the fact that “G” (governance) concerns a corporation’s supervisory process, while “E” (environmental) and “S” (social) focus on corporate impact. Ratings of one or several of the ESG components are invariably biased or partial, leading companies that follow them on a path of possible value destruction. Building sustainability on a flawed concept, or on flawed measurement, is simply not sustainable.
