ESG is pushing 20. The widely used acronym for “environmental, social and governance”, ESG was introduced in the report Who Cares Wins, which was published by the Global Compact of the United Nations in 2004.
Since then, ESG has influenced practices in companies and countries. It is an easy-to-use operational framework for the more abstract notion of sustainability.
Yet, ESG has almost taken on a life of its own and is often pursued as an end in itself. But that can backfire because ESG misses a vital part of the puzzle – economics. To keep that key in mind, we should recast ESG as “EESG”, with economics firmly in the frame.
Business imperative
As a starting point, there can be no sustainability if there is no business to begin with (business here is used in the broad sense to cover for-profit and non-profit entities, including public sector agencies and non-governmental organisations).
Business needs finance as its lifeblood, and this is where adding economics is critical to balance the ESG aspects of sustainability.
Consider recent business episodes that cast economics squarely into the sustainability equation.
In January 2024, the Texas oil giant ExxonMobil, which is well known by its trading name of Esso, filed lawsuits against climate activists in an effort to remove what the company described as an “extreme agenda” for its annual general meeting (AGM). The activists had pushed for an accelerated greenhouse gas emissions cut, which the company felt would not serve investor interests.
In its most recent AGM in 2023, ExxonMobil shareholders rejected all 12 climate-related resolutions, which included calls for the company to align with the Paris Agreement goals – the critical centrepiece of the international accord for countries to commit to reduced emissions to fight climate change.
Interestingly, also at their latest AGMs, other big oil companies like California-based Chevron – known for its petrol brand of Caltex – and Shell have seen shareholders voting against climate action proposals.
It is not just the big oil firms that are doing it.
Comcast, the multinational telecommunications and media monolith – which owns and operates famed brand names like CNBC, Universal Pictures and DreamWorks Animation within its gigantic business portfolio – has also seen its shareholders reject climate-related initiatives.
Economic battle
It is apparent that in the contest between economics and ESG, the former has won. Shareholders, whether rightly or not, prefer financial returns as an overemphasis on sustainability may decrease business performances.
The tension is even more pronounced when we see that the world’s largest asset management company – BlackRock – has literally blacklisted the word “ESG”. It is not that it does not believe in ESG any more; it is just that the term has become a contentious battleground. As BlackRock chief executive Larry Fink starkly puts it: “I don’t use the word ESG any more, because it has been entirely weaponised.”
The war about ESG is fought over economics, and I say: Why don’t we just use “EESG” so that all can consider the entirety of the equation and resolve the tension? What if we can even demonstrate that sustainability and profitability are not mutually exclusive but can perfectly coexist?
Performance effect
Most academic business research seems to reveal positive relationships between sustainability and business performances.
A Harvard Business School study analysing 180 companies over 18 years discovered that firms which prioritise sustainability outperformed their peers in the long run – they had better financial performance through return on assets and return on equity.
Another study, by MSCI ESG Research, established that companies with higher ESG ratings have lower costs of capital, which suggests that investors may view them as less risky.
In the Singapore context, in a published study co-authored with researchers Thomas Thomas and Wang Yu, I found that there is a significant and positive relationship between sustainability reporting and market value among listed companies here. This same result was also obtained for the quality of the reporting. The relationship seems to be independent of broad industry classification and firm status, such as whether the entity is a government-linked corporation or a family business.
In a separate published study of Singapore-listed companies together with co-author Sharmine Tan, I have determined that adoption and quality of sustainability reporting led to better brand value. A lag effect is also present, which connotes that the performance impact takes time.
The two studies form an interesting compendium that covers both investor and consumer angles in the economic conundrum of ESG. Indeed, economics and ESG can swim in the same lake and are not necessarily at odds with each other.
Valuation puzzle
But again, the relationship is not straightforward if we nail it down to a very specific domain that is key to the fight against climate change – the palm oil sector.
In the most recent published study, my co-author Tricia Chong and I found a valuation discount for global palm oil companies that disclose more ESG. We used an established ESG framework known as Sustainability Policy Transparency Toolkit, or Spott, developed by the Zoological Society of London, together with valuation data from Thomson Reuters.
Strikingly, we found a significant negative relationship between ESG transparency and firm valuation. In other words, the more transparent a firm is on ESG, the poorer its valuation. This relationship is even stronger among the larger palm oil companies.
The study results connote a stark reality of EESG – economics can overwhelm ESG in certain circumstances which validate shareholder tensions at the big oil, telecoms and media companies.
That is because sustainability is not just about environmental sustainability, but is more about the business which needs the lifeblood of finance.
That is why ESG must integrate economics into its fold. EESG is the way to go, but the colour of money has to be green too.
The article first appeared in The Straits Times.