ESG critics could leave money on the table and miss an opportunity to have real impact

In recent years, several converging forces have led companies to take greater responsibility for addressing key challenges in environmental sustainability, social justice and corporate governance – the area referred to as “ESG”.

Investors, aware of the impact of their decisions on these issues, have considerably increased their appetite for ESG investments. As the demand for worthwhile ESG investments outstripped the supply, asset managers started selling ESG products that weren’t truly eligible, leading to several greenwashing scandals.

ESG has come under heavy criticism, with billionaires Peter Thiel and Elon Musk calling it a “hate factory for naming enemies” and a “scam” respectively. While their concerns are greatly exaggerated, as scrutiny of the sector intensifies, savvy ESG investors will have the opportunity to advance their investment strategies to maximize both impact and returns.

Tenacious Resistance

The extraordinary growth in demand for ESG investing – along with the current wave of high-profile criticism – highlights the need for greater clarity around the definition of ESG.

I have decades of experience developing and acquiring green, affordable, mixed-income housing. The affordable housing sector is an area where the purpose, products, processes and treatment of people, when done correctly, can lead to measurable social benefits, with positive outcomes for affordable housing residents, neighborhoods, employees, ESG investors and society. When properly executed, developing or preserving green affordable housing can reduce risk and improve returns, benefiting both residents and investors.

Today, the US, UK and other prosperous countries are facing a deep affordable housing crisis, with a shortage of supply leaving low- and middle-income renters, young first-time buyers, older people and people of color excluded from the market. Simultaneously, the climate crisis is forcing us to rethink the way we build, preserve or improve homes to make them more environmentally resilient while reducing their environmental impacts. By tackling these two issues together, through investments in affordable and sustainable housing, ESG investors can produce environmental and social goods while realizing risk-adjusted financial benefits.

For example, the EPA notes that many of the energy efficiency strategies we employ can generate a return on investment of 2.1 years or better and a return on investment of nearly 50%. Our company has purchased about 90 affordable housing units from others. Either way, we found there were easy improvements to energy efficiency. Why didn’t the previous owners undertake these efforts, if only for the financial benefit? Because they, like the aforementioned ESG critics, often view environmental improvements as a tax rather than a contributor to profits.

The natural gas industry provides another interesting example of cognitive dissonance. When alerted that their gas pipelines were leaking excessive amounts of methane, polluting the air with toxic chemicals and costing them millions, the big oil companies were still hesitant to plug the gas leaks.

Why wouldn’t a natural gas company tighten its wells at a cost of about $11,000 per well, if it could return three times that investment in a single year? A stubborn resistance to any environmentalism clouded their ability to see that this simple step could bring significant economic benefits.

The true economic value of ESG

ESG investors are increasingly taking note and distinguishing between degenerative products – which degrade the health of people and the environment – and regenerative products, which promote the well-being of people and the planet, because these distinctions are increasingly correlated with economic value. For example, a product’s harmful effects on human health reduced the value of chemical giant Bayer by $20 billion.

Investors are increasingly turning to global reporting standards that enable accurate and transparent measurement of their practices to assess the impact of corporate efforts, such as the Sustainability Accounting Standards Board, the Task Force on Climate Related Financial Disclosures and the Climate Disclosures Accounting Board. These should be complemented by industry standards, such as GRESB (The Global ESG Benchmark for Real Assets), which one can use to benchmark their work against others.

Well-thought-out ESG strategies can help investors reduce risk and increase returns. The current critical look at ESG is a good thing. It will channel investments to companies that create the most regenerative, societal and environmental value, with the potential to create long-term economic value.

However, like fossil fuel companies that leave savings on the table, investors who ignore the risk of harmful products and denigrate ESG as a concept risk missing out on its potential to combine environmental benefits. , social and economic.

Jonathan FP Rose is the CEO of Jonathan Rose Companies.

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