The road to climate change is paved with good intentions
30 June 2023
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In the Media
Government and Institutions
Economic Theory
Matthew Lesh writes for City AM
IEA Director of Public Policy and Communications Matthew Lesh has written in City AM discussing the unintended environmental damage caused by environmental, social, and governance (ESG) investing.
Matthew wrote:
“The companies that score the highest on ESG metrics, particularly on the environmental side, are the ones that have a relatively low level of carbon per pound of revenue. That means the likes of financial services, healthcare and digital are ‘green’. By contrast, companies that produce building materials, fertiliser or energy are ‘brown’. The result of ESG investing is the transfer of capital from good to bad companies – thus it is meant to incentivise ‘brown’ companies to reduce their emissions.
“But, in an ironic twist, a new study indicates that ESG investing is counterproductive in practice. Kelly Shue of Yale University and Samuel M. Hartzmark of Boston College investigated the environmental impact of over 3,000 large companies between 2002 and 2020. They find that green companies’ lower cost of capital does not lead to reduced emissions. This makes sense since the likes of Spotify or a hospital are not particularly heavy emitters and have little capacity to reduce emissions; brown companies produce 260 times higher environmental impact. By contrast, when brown companies are starved of capital, they become dirtier to avoid bankruptcy. ‘When you punish brown firms, they become more short-termist,’ Shue writes. This all means much less capital available for green technologies.”
Read Matthew’s full piece here.
Matthew wrote:
“The companies that score the highest on ESG metrics, particularly on the environmental side, are the ones that have a relatively low level of carbon per pound of revenue. That means the likes of financial services, healthcare and digital are ‘green’. By contrast, companies that produce building materials, fertiliser or energy are ‘brown’. The result of ESG investing is the transfer of capital from good to bad companies – thus it is meant to incentivise ‘brown’ companies to reduce their emissions.
“But, in an ironic twist, a new study indicates that ESG investing is counterproductive in practice. Kelly Shue of Yale University and Samuel M. Hartzmark of Boston College investigated the environmental impact of over 3,000 large companies between 2002 and 2020. They find that green companies’ lower cost of capital does not lead to reduced emissions. This makes sense since the likes of Spotify or a hospital are not particularly heavy emitters and have little capacity to reduce emissions; brown companies produce 260 times higher environmental impact. By contrast, when brown companies are starved of capital, they become dirtier to avoid bankruptcy. ‘When you punish brown firms, they become more short-termist,’ Shue writes. This all means much less capital available for green technologies.”
Read Matthew’s full piece here.
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