ESG has been a very popular word in the business world in the last couple of years, as it should. ESG investing funds started as a result of this. Even though their intentions are good, Yale Professor Kelly Shue argues they end up hurting the environment.
ESG investing, in the most common way, is based on investing in 'green' companies, and punishing brown ones, the green companies emit less carbon companies have high emissions. There is one problem with this: the green and brown rating depends on the nature of the business as well as the company's choices. Green firms are services firms like Goldman Sachs, while Brown firms are companies like Exxon Mobil.
When you invest in green firms, you lower the cost of capital for them, but they really can't do that much to become any greener, brown firms on the other hand, face a higher cost of capital and make more short-term oriented decisions becoming even browner.
What is the solution here: CO-OPERATION. If we cooperate with brown firms through activist investing, they can reduce their carbon emissions, and in most cases improve their income statement. Engine One, an activist fund, has already done this with Exxon Mobil. So, the bottom line is, that your capital is better used making brown firms greener, than punishing browns and rewarding greens, the carrot is more powerful than the stick in this case.
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