For anyone interested in “level-headed” ESG investing

Alex Edmans is a pioneer in ESG research. He has published one of the most globally-acclaimed papers on corporate responsibility and long-term profitability, and advised companies, investors, and policymakers on ESG issues. Now he is launching a flagship ESG investing programme – here he explains why and how he intends to go about it. 

Back in 2011 I wrote a paper that sparked a lot of debate. “Does the stock market fully value intangibles?” looked at the long-term returns of companies that treated employees ethically: Fortune magazine’s “100 Best Companies to Work For in America.” What I found was empirical evidence that these firms consistently outperformed their competitors. As such, the paper did something new: it made the business case for corporate social responsibility. Treating people well wasn’t just the right or nice thing to do. It was the profitable thing to do in the long run. 

My paper helped ignite a conversation; one that has gone on in the intervening years to excite a good deal of strong emotion. The debate around environmental, social and governance (ESG) factors in business attracts its equal measure of proponents and cynics; one group decrying the other as woke or sanctimonious, while the others are bigots or flat-earthers. There is a culture war raging around ESG that has scholars, investors, businesses and the media alike up in arms. And it’s a war fueled by zealotry and sustained by an inability or unwillingness to admit any difference of opinion. ESG as a term has become weaponised.

But here’s the thing: ESG is simply not that amazing. Let me say that again. ESG is nothing special.

One of the major concerns that people have about ESG—one of the reasons it excites such fervent (negative) sentiment—is that investors will only focus on ESG factors and ignore everything else when they’re valuing a company. Of course, putting ESG on a pedestal like this would be akin to appointing me to the board of a company because I tick some ethnic minority box, when in fact I should be assessed on my full credentials and expertise. And if I don’t have the right expertise, I’m clearly not the right person for the job irrespective of what I bring to ethnic or cultural diversity. 

I am an advocate of ESG, and I believe it can achieve certain things. But I am also a huge advocate of being level-headed about what those things are, and about the limitations and legitimate concerns that there are surrounding ESG investing. 

For this reason, I’m teaching a new programme at London Business School starting in 2024 that unpacks ESG investing from a business perspective and provides balanced and pragmatic frameworks so that if professionals wish to practise it, they practise it the right way.

ESG Investing: A level-headed approach to long-term investments

When I first started working on ESG almost 20 years ago, the term didn’t exist. Back then, I was motivated by a straight-forward belief that in companies the most important assets weren’t machines but human beings. I believed there was an innate logic in treating your employees well and driving engagement that would in turn yield better long-term business results. My research then was based on the idea that investing in your people had nothing to do with ideology or political orientation, it just made solid business sense. 

Today I still stand by this view. ESG investing, simply put, is the incorporation of environmental, social and governance factors into important investment decisions. And this in itself is neither political nor controversial. There will be investors who see ESG factors as critically important to assessing the value of a company, and others who prefer to focus on other things— competitive outlook, strategy, capital allocation, capital structure, profitability and so on. A balanced approach is to look at multiple perspectives and to apply sound economic principles to decisions around valuation and investment. 

I’d love to be able to market my new programme on ESG Investing by debunking what we know about finance. I’d love to be able to say: our understanding of finance is no longer fit for purpose in 2023; or that my new programme is a paradigm shift with a special focus on ESG such that investors can learn new, ESG-specific things. But this is simply not the case. 

ESG investing is the same as any other long-term investment. And as such, it can be analysed and understood using general finance and economic principles. 

In the new programme my colleagues and I will demonstrate how to use mainstream principles and existing, tried-and-tested frameworks, reorienting them to respond to two core questions: how to best achieve ESG in organisations; and how to best incorporate ESG into valuation. It’s my goal that participants coming to LBS will discover how to approach these topics based on solid economics and finance and years of research—rather than ideology, gut feeling or shooting from the hip.

A blend of research and practitioner expertise

Our new programme draws fully on decades of scholarship—my own and that of other leading thinkers in finance—and integrates a wealth of practitioner experience to provide rich and highly nuanced content. 

I bring in my own experience of advising asset managers and serving in the World Economic Forum’s Global Future Council on the Future of Responsible Investing. And we will hear from some great industry experts who are very heavy hitters with a real diversity of perspectives. Among our guest speakers are figures with real clout such as Edward Bonham Carter, the Vice-Chairman of Jupiter fund management group, and Norges Bank’s Carine Smith Ihenacho. We also have speakers from the corporate world who can share insight into how companies think and act in the context of ESG.

The program is really comprehensive in terms of looking at different aspects, the pros and the cons of ESG investing. We ask things like: Can you be an ESG investor by buying and selling particular stocks; or by engaging with companies and telling them how to improve their operations? And we look at what ESG investing can realistically achieve. 

Then we dig into how to practise ESG. And here we look at the strategies that do and don’t work. We ask a new set of questions: Should you completely divest from fossil fuels? Or do you buy fossil fuel companies and engage with them to make them better? We look at where you can surface reliable data to assess a firm’s performance in ESG and how to incorporate that data into valuation. 

It's my hope that this will become the go-to programme for anyone looking for a balance of perspectives undergirded by real ESG expertise. 

A programme for anyone interested in investing in ESG

I’m really keen to debunk the furore surrounding ESG investing and the attendant camps or ideologies that muddy understanding. I want people to ask themselves: what is ESG fundamentally? My approach is that ESG is really about creating long-term value. And I believe that should be important to anyone interested in investing, irrespective of whether they are old or young, left or right-leaning, Republic or Democrat. 

This is a programme then for everyone interested in investing, be they asset managers, working in pension funds, neutral funds or investing as a sideline. It’s also a programme for organisations who need to understand the criteria and motivation of their investors, so I expect to see executives in investor-facing roles or involved in capital raising. To be very clear, our programme will analyse complex and nuanced material, so we’re not offering a kind of ESG Investing 101. But even if participants are new to these topics, it will still be accessible. And this is important, I believe, because ESG itself is important. 

ESG is germane to the long-term success of any company, because all companies have some kind of impact on society and the environment. My strong belief is that ESG will become increasingly mainstream. As the culture war recedes and all the furore abates, I foresee ESG becoming less of a niche issue— and more of an accepted and normalised valuation criterion; one every bit as critical as competitive positioning or balance sheets.