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Investing for Impact and Profit

Although environmental, social, and governance investing has become increasingly fashionable, it has not lived up to its promise. Activists and advocates have tried to change the basic logic of financial investment and corporate governance when they should be focusing on ways to harness it.

PARIS – Environmental, social, and governance (ESG) standards are the talk of the investment world these days. But despite the trillions of dollars of investments that have been labeled “ESG,” this form of investing has yet to have much real-world impact.

This is especially true on the environmental front (though such investments’ social impact has not been much more evident). Investor coalitions to combat climate change have exploded onto the scene, promising to steer a massive amount of capital toward “green” businesses and industries. At last year’s United Nations Climate Change Conference (COP26), private financial institutions pledged to mobilize $130 trillion – a figure greater than global GDP – for clean energy. And yet, the climate outlook is only worsening. Last month’s report from the Intergovernmental Panel on Climate Change offered “the bleakest warning yet” about what awaits humanity on a rapidly warming planet.

Welcome to the world of greenwashing: Though firms’ owners have committed to cutting carbon dioxide emissions, they have not actually ordered firms’ managers to do so. But, instead of blaming investors or companies, ESG activists should consider why there is such a large, persistent gap between public commitments and action. Simply put, climate advocates have failed to persuade investors and firms to act because they have failed to understand what ultimately drives business.

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