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Opinion/Comment

Is ESG investing contributing to transitioning to a sustainable economy or to the greatest misallocations of capital and a missed opportunity?

Dr. Madelyn Antoncic
Journal of Risk Management in Financial Institutions, 15 (1), 6-12 (2021)
https://doi.org/10.69554/IJOD5717

Abstract

Environmental, Social and Governance (ESG) investing has become a focus not only of the asset management industry but also among policy makers as a way to mobilise capital for sustainable economic development. While this could be the mechanism through which capital is allocated to companies and technology of the future to help transition to a net-zero sustainable economy and to deliver on the UN SDGs, all of the ‘noise’ around ESG reporting coupled with the ESG ‘investing frenzy’ may more likely end up being the greatest misallocation of capital and a missed opportunity. Asset owners’ strong interest in investing in ‘green’ assets to transition to a net-zero sustainable economy has led to a growing trend of asset managers labelling and rebranding mutual funds and ETFs as ESG and even mainstream funds are advertising employing ‘ESG integration’. At the same time, significant ‘greenwashing’ exits at the company reporting level due to the lack of agreed standards. Moreover, poor correlations across ESG score providers for a given company as well as intentional built-in biases introduced into the scoring and the total lack of any analysis taking into account ecological ceilings, sustainability thresholds and outer boundary limits of natural resources, will all likely lead to material capital allocation distortions. ‘Greenwashing’ at both the asset manager and the corporate level and the resultant misallocation of capital is likely setting the stage for potential risks including significant macroeconomic and geopolitical risks, as well as risks to the financial markets and financial institutions.

Keywords: ESG; transition to a net-zero sustainable economy; Paris Agreement; UN SDGs; European Green Deal; climate risk

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Author's Biography

Dr. Madelyn Antoncic was Senior Advisor to UNCTAD on SDG reporting; is a former World Bank VP and Treasurer; and former CEO of SASB. She is known for leadership in financial innovation on climate-risk mitigation and has held leadership roles in large complex global financial institutions for over 30 years having begun her career as a Federal Reserve Economist. She is an internationally recognized expert on risk and ESG; a frequent speaker at various fora including at the UN General Assembly SDG Biz Forum Plenary; and is the subject of graduate school case studies concerning the Great Financial Crisis. She is recipient of numerous awards; was listed among the 100 Most Influential People in Finance; and among the top thought leaders helping shape accounting in 2020.

Citation

Antoncic, Madelyn (2021, December 1). Is ESG investing contributing to transitioning to a sustainable economy or to the greatest misallocations of capital and a missed opportunity?. In the Journal of Risk Management in Financial Institutions, Volume 15, Issue 1. https://doi.org/10.69554/IJOD5717.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 15 / Issue 1
© Henry Stewart
Publications LLP

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