The term ESG has been in the news a lot lately.
Both the GOP on the national level, and Indiana GOP politicians on the state level, are trying to pass laws prohibiting investment brokers from considering ESG factors when making investments. United States President Joe Biden, a Democrat, recently vetoed a law to ban the consideration of ESG factors by investment professionals.
The Bloomingtonian reached out to Indiana University Director of the Tobias Center for Innovation in International Development, and Associate Professor, International Studies to learn about ESG.
Bauerle Danzman wrote the following about what ESG is, and isn’t:
“ESG stands for “Environment, social, and governance.” The idea behind ESG investing is that standard financial asset pricing and risk modeling techniques do not fully incorporate the costs and risks associated with environmental, broad social, or political governance concerns. ESG investment is NOT the same as socially responsible or impact investing. Socially responsible/impact investors make a moral or ethical decision to refrain from investing in certain activities that they find morally problematic. In doing so, they accept the possibility that their non-market choices will result in lower investment returns. ESG investors, instead, are market driven. They are making bets that companies that take ESG factors into consideration now will be more profitable and more highly valued by market forces in the future. These investors see economic value in pricing in the environmental, social, and political governance costs that companies create when they make short term decisions that generate bad outcomes on these metrics. By investing in companies that have “better” risk management strategies with respect to these issues, ESG investors believe they will maximize their long term investment returns.
By way of example – fast fashion companies that underinvest in compliance with labor standards can face legal and reputational risks. For example, many apparel companies ignore these kinds of concerns in the early 2010s. A large apparel factory collapse in Bangladesh (the Rana Plaza disaster) created substantial potential legal costs to these firms and the potential for consumer boycotts. ESG investors are ones that try to anticipate the ways in which underinvestment in these kinds of concerns could create financial costs for companies in the future, and instead invest in companies that are doing a better job of managing these risks.”
Sarah Bauerle Danzman is an expert on the political economy of international investment and finance. She researches how domestic and multinational firms influence and adapt to investment regulation, the nexus of national security and investment, and how rules governing capital shape global networks of ownership and production. Her book, Merging Interests: When Domestic Firms Shape FDI Policy (Cambridge University Press, 2019), examines how changes in global and local credit conditions affect domestic firms’ policy preferences over regulation of foreign investors, and explores how firms leverage their power resources to influence regulatory structures. In 2019-2020, she was Council on Foreign Relations International Affairs Fellow, working in the U.S. Department of State as a Policy Advisor and Foreign Investment Security Case Analyst in the Office of Investment Affairs. Her work has been published or is forthcoming in outlets including International StudiesQuarterly, Perspective on Politics, Review of International Political Economy, Review of International Organizations, Business and Politics, and International Interactions.