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Yale study: ESG investing isn’t doing much for the environment

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By illuminem briefings

· 2 min read

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🗞️ Driving the news: ESG (Environmental, Social, and Governance) investing is facing scrutiny as a new study reveals that it may not effectively reduce carbon emissions
• A study by Yale University and Boston College researchers investigated the environmental impact of over 3,000 large companies and found that ESG investing, ironically, may be counterproductive

🔭 The context: ESG investing involves transferring capital to "green" companies with lower carbon emissions relative to revenue
• It is seen as a way to incentivize “brown” companies, usually heavy carbon emitters like energy and building materials producers, to reduce their emissions

🌎 Why does it matter for the planet: According to the study, while green companies benefit from a lower cost of capital through ESG investing, it does not translate into reduced emissions 
• Instead, the “brown” companies, when deprived of capital, tend to focus on short-term survival and may even increase their emissions to avoid bankruptcy
Furthermore, larger companies might sell off older assets to appear greener, but those assets often become even less environmentally friendly under new ownership

⏭️ What’s next: The study raises questions about the effectiveness of ESG investing in combating climate change 
• It points to the necessity of more strategic and comprehensive approaches, such as government intervention through policies like carbon taxes, and investments from a range of players including 'dirty' industries, energy producers, and green startups, to foster innovation and genuinely reduce environmental impacts

💬 One quote: “When you punish brown firms, they become more short-termist” (Prof. Kelly Shue, Yale University)

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