What You Should Know

In recent years, corporations, investors and consumers have shown increased interest in business practices that go beyond the basics of how goods and services are produced or sold. “ESG” is a set of criteria that measures a business’s commitment to Environmental, Social, and Governance (ESG) principles. Often, these take the form of environmental sustainability practices, social justice issues, and democratic and fair corporate governance.

Undoubtedly, every business should act ethically and legally. Every business should treat workers and investors with respect and should be transparent. Every business should consider how its practices impact the environment and society more broadly. It’s admirable—and indicative of our wealth—that so many Americans show interest in how businesses behave.

However, incorporation of ESG principles can come in many forms. Some forms are commendable, such as pledging to not use products made by slave labor, while others are misguided, like committing to net-zero carbon emissions even though we lack the technology to make that a sound financial or realistic goal.

At its worst, ESG investing is used as a form of virtue-signaling, promoting issues that are not necessarily related to actual environmental progress, or greater inclusivity and fairness (and can even encourage the opposite). For many companies, incorporating ESG values is simply selling a new product: the good feelings that come along with the belief that one is, by funding certain companies and not others, making the world a better place, even when in reality it is just making the world more politicized and divisive.