Emphasizing the ‘G’ in ESG
February 10, 2012
During his keynote speech at the FSinsight launch, Lloyd Kurtz identified the three major challenges to sustainable finance: Governance; the urgency of climate change; and overconfidence (and therefore inertia) in investment professionals and scholars in driving ESG-focused finance. Elaborating on these issues for this FSinsight video, Kurtz says that governance is considered by some to be the “small ‘g’ in ESG” but that it is in fact extremely important. “Governance is a sensitivity of the company to outside forces – society, government, and external organizations which might want to prompt change of some kind. The goal of good governance is to make organizations accountable to society.”
However, potential for such bad behavior as ‘regulatory capture’ — in which companies achieve a high degree of influence over their regulatory bodies —“is not just bad, but the opposite of good governance. There’s really no social or sustainability progress possible in a company like that,” he says. Therefore the adoption of global regulatory standards is essential for the environment and society.
Climate change remains the most urgent environmental drama, particularly when dealing with emerging economies like that of China, says Kurtz. Most investment ‘clout’ is held in wealthy Western countries, currently removed from the direct effects of climate change -effects that are already being felt in China. “With a per capita income that is one-quarter of that in the US, China doesn’t have the same level of economic means to effect positive change…what is needed is some type of market solution so that capital can be directed towards long term sustainability solutions athat are helpful to china and other emerging markets,” he says.
Of all challenges to ESG, overconfidence in investment professionals may be the greatest — in part because it goes hand-in-hand with their intelligence and expertise. “The high skill level of many people in the financial industry — their focus, their concentration, their intelligence — are all things that correlate with overconfidence,” he says. “This has always been a problem for the adoption of ESG and social investing — many very confident investors don’t see a particular need for ESG.” Overconfidence also leads to inertia and complacency, which Kurtz finds “threatening and potentially very destructive.”
This video interview was recorded in Amsterdam on 1 February 2012 during the Official launch of FSinsight.
Low-res video (mp4)
Audio transcript (mp3)
Lecturer of social investing, Haas School of Business