ESG critics could be leaving money on the table–and missing an opportunity to make a real impact

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In recent years, several converging forces have led businesses to take on a greater share of the responsibility to address key challenges across environmental sustainability, social justice, and corporate governance–the field termed “ESG.”

Investors, recognizing the impact of their decisions on these issues, have dramatically increased their appetite for ESG investments. As the demand for valid ESG investments outstripped the supply, asset managers began to sell ESG products that didn’t really qualify, giving rise to several greenwashing scandals.

ESG has come under intense criticism, with billionaires Peter Thiel and Elon Musk lambasting it as a “hate factory for naming enemies” and a “scam,” respectively. While their concerns are bombastically overstated, as scrutiny of the sector mounts, discerning ESG investors will have an opportunity to advance their investment strategies to maximize both impact and returns.

A stubborn resistance

The extraordinary growth in demand for ESG investments–as well as the current spate of high-profile critiques–point to the need for greater clarity as to how ESG is defined.

I have decades of experience developing and acquiring green, affordable, and mixed-income housing. The affordable housing sector is a field in which the purpose, products, processes, and treatment of people, when executed properly, can result in measurable social benefits, with positive outcomes for affordable housing residents, neighborhoods, employees, ESG investors, and society. When properly executed, the development or preservation of green affordable housing can reduce risks and enhance returns, benefiting both residents and investors.

Today, the U.S., the U.K., and other prosperous nations are facing a profound affordable housing crisis, with a supply shortage leaving low and moderate-income renters, young first-time buyers, seniors, and people of color locked out of the market. Simultaneously, the climate crisis demands that we rethink how we build, preserve, or upgrade homes to make them more environmentally resilient while reducing their environmental impacts. By tackling both issues together, through affordable and sustainable housing investment, ESG investors can produce environmental and social goods while realizing risk-adjusted financial benefits.

For example, the EPA notes that many of the energy efficiency strategies we employ can generate a 2.1-year payback or better on cost and a return on investment of almost 50%. Our firm has purchased about 90 affordable housing properties from others. In every case, we found that there were easy energy efficiency improvements to be made. Why didn’t the previous owners undertake these efforts, even if only motivated by the financial benefit? Because they, like the aforementioned ESG critics, often perceive environmental improvements as a tax rather than a contributor to profits.

The natural gas industry provides another interesting example of cognitive dissonance. When alerted that their natural gas pipelines were leaking excessive amounts of methane gas, polluting the air with toxic chemicals, and costing them millions, major oil companies were still reluctant to seal the gas leaks.

Why wouldn’t a natural gas company tighten up its wells at a cost about $11,000 per well, if it could return three times that investment in a single year? Stubborn resistance to all environmentalism clouded their ability to see that this simple step could provide significant economic benefits.

The real economic value of ESG

ESG investors are taking note and increasingly distinguishing between degenerative products–which degrade the health of people and the environment–and regenerative products, which promote the well-being of human beings and the planet, as these distinctions increasingly correlate with economic value. For example, one product’s harmful effects on human health reduced the value of chemicals giant Bayer by $20 billion.

Investors are increasingly looking to global reporting standards that enable accurate, transparent measurement of their practices to assess the impact of businesses’ efforts, such as the Sustainability Accounting Standards Board, the Task Force on Climate Related Financial Disclosures and the Climate Disclosures Accounting Board. These need to be complimented with sector-specific standards, such as GRESB (The Global ESG Benchmark for Real Assets), which one can use to compare their work with others.

Well thought-out ESG strategies can help investors reduce risk and increase returns. The current critical eye on ESG is a good thing. It will channel investments towards the businesses that are creating the most regenerative, societal, and environmental value, with a potential to achieve long-term economic value.

However, like the fossil fuel companies that leave savings on the table, investors who ignore the risk of harmful products and disparage ESG as a concept are likely to miss out on its potential to combine environmental, societal, and economic benefits.

Jonathan F.P. Rose is the CEO of Jonathan Rose Companies.

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