What I learned about the promise of ESG from the nonprofit double bottom line

As a nonprofit CFO for 20+ years, I learned not only the importance of the concept of the double bottom line, but also how very difficult it is to measure. It comes as no surprise to me that even with a multi-billion-dollar ratings industry and over 600 raters, companies trying to measure their double bottom line are having great difficulty. 

ESG are environmental, social and governance standards used to evaluate a company’s operations and help investors screen potential investments. It attempts to quantify the relationship between adherence to ESG criteria and financial performance. The promise of ESG compared to its older sibling SRI (socially responsible investing), is that it’s more quantitative, calculable. And maybe, just maybe, it might prove the hypothesis we all want to believe, that better ESG companies have better long-term financial returns. 

But it’s not that simple, as those of us in the nonprofit industry could have told you decades ago. A Sloan/MIT research paper shows that six major ratings agencies diverged in their ratings of the same companies by quite a lot – a correlation among ratings of only .54. An earlier study of three major ratings agencies found it to be .30. By comparison, commercial credit rating agency correlations are .99. This is a big problem for those of us that want to connect ESG ratings and financial returns. 

Then what’s the answer for the values-driven investor? Can we rely on ESG? We can, but certainly not with the confidence that many are professing. Just last month the the SEC announced they are investigating the marketing claims of ESG investments. 

We should be just as skeptical of ESG as the nonprofit donors to whom we showed our home grown ‘impact statistics’. Hopefully that donor still made their contribution. And you should too if it matters to you. The absence of high standard, peer reviewed evidence should not keep you from investing with your values.