What is ESG investing? | John Fullerton | Big Think

The idea of ESG in investing, which stands for environmental, social, and governance, has been around probably for twenty years now. It sort of followed the SRI movements of socially responsible investing, and this was our attempt to think beyond shareholder value and what other values mattered to the health of a corporation in the long, long run.

So, ESG—environmental, the company's environmental performance and behavior; its social—it's the way it treats its employees, the way it treats its consumers, how it behaves in its community, healthcare benefits that it gives, that kind of thing. Governance is the question of whether the company is well governed or not. There's a sort of common-sense recognition that those attributes and those values are also important. It's not just shareholder value; it's a broader set of values.

There’s been, you know, probably billions of dollars invested in measuring and disclosing ESG factors by public corporations. Of course, more disclosure about these issues is definitely good. You know the old saying: "light sunshine is the best disinfectant." So, if companies are required to report on these things, they're going to manage them, and that'll be a positive outcome.

What that whole idea, though, failed to address is the thing I talked about earlier, which is that public companies that operate in public capital markets, whether they disclose everything perfectly or not, are sitting in a system where they’ve been separated—the relationship between their true owners has been separated by the capital markets or disintermediated by the capital markets. Their engagement with their direct owners happens, maybe, once a year at the annual meeting in a proxy vote.

But in a private company, for example, the owners of the company are on the boards of directors. Their wealth is tied up in the company, and they pay very close attention to the company. So, I do argue that we'll never solve the unsustainability crisis in business simply through more transparency, ESG, and otherwise. We need to use that data to manage businesses, but we also need to reconnect them fundamentally with the owners of the enterprise.

The thing about the principles of living systems is that they're not kind of a menu you can pick and choose from. Healthy living systems operate in accordance with all of them all at the same time, or a system gets sick and dies. You know, you get cancer when at a cellular level you're not communicating effectively.

So ESG can be all well and good, but if we don't also deal with the right relationship point, it goes for naught. I wouldn’t suggest that the work in the ESG movement over the last 20 years has not been beneficial, but it certainly has not achieved the outcomes that they'd hoped for. Interestingly, I now often get invited to an ESG conference because people in the ESG community recognize that there must be something more to it than the work that they're working on.

I used to say, "Well, you sure they're ready for my message?" because it's not consistent with their worldview. And that’s now no longer a concern; people are hungry for fresh ways to think about things. So that's progress. Get smarter faster; new videos every week for the world's biggest thinkers.