ESG Investing Needs to Expand Its Definition of Materiality

What will it take to put a real S in ESG?

By Tom AdamsLindsay Smalling & Sasha Dichter

Environment, Social, and Governance (ESG) investing—an approach to investing designed to consider a wider set of factors that influence financial returns—is everywhere. ESG is so hot, it will be a $1 trillion market by 2030. Finally, it seems, finance is thinking seriously about social factors in investment.

But whilst “ESG goes mainstream” is an attractive and seemingly good-news headline, the reality so far is mixed at best, underwhelming at worst. Specifically, the way the ESG market has developed limits the potential benefits these trillions of dollars of capital could have on society and the planet.

These limitations exist for two primary reasons. First, because only factors that affect financial returns are considered “material” for ESG investors. And second, because the S in ESG remains woefully underdeveloped.

The definition of S is still up for grabs and, without a serious reflection on ESG to date, we run the risk of compounding the original sin of ESG: ignoring the issues that matter to people and planet but don’t directly affect the bottom line. If we continue down this path, ESG investing is almost certain to remain a smokescreen, one that creates the appearance of a more socially impactful approach to capitalism while ignoring some of the most significant negative effects business can have on people and communities.

Read the full Stanford Social Innovation Review article below.

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