Can we really make $4 trillion fall from the sky? (Part 1)

21 Oct 2023 | A statement is not fact

In late 2022, a CEO posted this on LinkedIn:


Having written a book on the value of ESG, I was intrigued. I clicked on the link, and it took me to the following article from Capital Monitor, a provider of sustainable investing news:


The cover photo for the story has the caption ‘New research from Moore Global shows a clear connection between ESG and improved financial performance’. And it gets even more persuasive. Half-way down the page, there was a sub-heading suggesting that if you do ESG, you’ll suck in money like a magnet:


But the Capital Monitor article is still only a description of the study; it wasn’t the actual study. One extra click took me to Moore Global’s website:

Its punchline was that ESG improves a company’s bottom line — so much so that, if all firms embraced ESG, their profits would rise by $4 trillion in total. But when I read the actual study, I was astonished to find that it never measured ESG at all. It never gathered data on carbon emissions, water usage, workforce diversity, employee injuries, director independence, or anything else. Nor did it use any of the numerous third-party ESG ratings available.

The study is very unclear on what they actually measure, but what is clear is that it’s not ESG. Some sentences suggest that they ask companies whether they thought ESG has become more important over the past three years, which is completely different from ESG performance. I know that artificial intelligence has become more important, yet I know very little about AI nor have I made any serious efforts to learn about it. The Capital Monitor article is titled “Link between ESG and profitability exists”— but it should have been “Link between claiming to think that ESG is important and profitability exists.”

Other sentences suggest that they ask companies whether they adopted ESG, which is also problematic as it’s entirely self-reported (unlike carbon emissions which are independently vetted). The tail likely wagged the dog — rather than ESG causing better performance, it was performance that caused self-reported ESG. Take two pro-ESG CEOs, both of whom devoted the same actual attention to ESG. Annabel ends up outperforming, and Balbinder underperforms. Annabel will report that she put high effort into ESG, but Balbinder will say the opposite to avoid cognitive dissonance — he won’t want to admit that his efforts didn’t pay off. If you run a marathon and get a bad time, you’ll pretend that you didn’t train.

The Moore Global study is far from an isolated example. Six weeks later, EY released their own research with the headline ‘The EY Sustainable Value Study finds that companies acting on climate change realize above-expected returns across five sources of value’. That study was also widely trumpeted, with headlines such as ‘Why Companies Focused on ESG Perform Better’ and ‘COP 27: Turning the tide on climate change drives business value.’

But the study never measured returns, performance, or value. It simply asked companies how much value they thought their climate change initiatives created. Even if respondents were completely honest, it’s very difficult for them to measure this accurately — they don’t launch climate change initiatives in isolation, but typically do so alongside other programmes. If performance rises afterwards, it could be due to the climate initiative, other concurrent programmes — or something totally different like the economy doing well.

The study’s punchline finding was that a majority if companies (69%) claimed that their climate change initiatives did better than expected. That’s completely unsurprising — you’re likely to say that your initiatives succeeded. If you reported the opposite, you’d have to admit that you launched a bad project, or managed it poorly. A more accurate headline would be ‘Companies that pursued climate change initiatives claimed that they did better than expected’ — or even ‘Companies that pursued climate change initiatives were reluctant to admit that they failed’.

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