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Aswath Damodaran says ESG investing will not make you money, it’s a mistake


MUMBAI: Famend academician Aswath Damodaran says the development of ESG (environment, social and governance) investing that has caught on quickly world wide would find yourself costing firms and buyers dearly.

“I consider ESG isn’t just a mistake that may value firms and buyers cash, whereas making the world worse off. It creates extra hurt than good for society,” Damodaran, professor of finance at Stern College of Enterprise at New York College, wrote on his weblog Musings on Markets late Tuesday.

ESG investing has been one of many defining funding traits of the twenty first century with practically $3 trillion of property at present being managed underneath some type of ESG mandate or different by asset managers world wide. In India too, ESG investing has taken off in a significant manner over the previous three years, with extra mutual funds popping out with “ESG solely” schemes to cater to the rising demand.

The Securities and Alternate Board of India (Sebi), being attentive to the rising demand for extra ESG-related disclosures, lately revamped the enterprise duty reporting requirements on points similar to environmental impression, social welfare and company governance by firms.

“Why is ESG being offered so aggressively? As a result of accountants, measurement companies, fund managers and consultants are on the ESG gravy prepare, with stockholders and taxpayers paying. Company CEOs are shopping for into ESG, as a result of it makes them accountable to nobody,” Damodaran mentioned.

The rising sway of ESG funds world wide has been pushed by ‘millennials’ and ‘Era Z’ buyers, who wish to spend money on firms which might be taking motion on local weather change and social welfare. The motion acquired an extra push when a number of the largest names in finance got here collectively to maneuver in the direction of stakeholders’ capitalism from shareholders’ capitalism.

Damodaran drew a parallel between the present wave of ESG investing to the company governance wave seen 20 years in the past within the aftermath of the Enron scandal. The Enron episode pushed proxy advisors, accountants and ruler writers to ask for extra disclosures for firms within the identify additional enhancing shareholder energy.

“The truth that the company governance motion solely enriched companies, consultants and bankers, however left shareholders extra powerless than they had been earlier than the motion began, holding shares in firms with twin class shares or worse, ought to act as a warning for the advocates of ESG disclosure/measurement,” Damodaran mentioned.

For buyers who’re gobbling up ESG funds within the hunt for increased returns that places much less burden on their social consciousness, Damodaran mentioned if the market is over-enthused about ESG and is overpricing how a lot being “good” will add to an organization’s profitability or cut back threat, then investing in ‘good’ firms will generate decrease risk-adjusted returns than investing in ‘dangerous’ firms.

“If being good makes firms much less dangerous, buyers in good firms will earn decrease returns than buyers in dangerous firms, earlier than adjusting for threat, and equal returns after adjusting for threat,” Damodaran mentioned.

‘The Professor’, as lots of his admirers name him, is a part of a rising checklist of buyers who’re changing into more and more skeptical of funding choices which might be giving an excessive amount of weightage to what an organization’s ESG rating is, than to its elementary intrinsic worth.

“I’m actually not prepared to concede, with out problem, {that a} company CEO is aware of my worth system higher than I do, as a shareholder, and is healthier positioned to make judgments on how a lot to present again to society, and to whom, than I’m,” Damodaran mentioned.



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