A Kingdom Perspective on ESG and Impact Investing
Article originally hosted and shared with permission by The Christian Economic Forum, a global network of leaders who join together to collaborate and introduce strategic ideas for the spread of God’s economic principles and the goodness of Jesus Christ. This article was from a collection of White Papers compiled for attendees of the CEF’s Global Event.
by Ben McLain
Often, when I meet someone new and tell them that I work at Impact Foundation, their response is, “Oh, so you’re involved with that ESG stuff.” I usually just smile and reply “Something like that,” but inside, my stomach turns, and I want to explain that I’m actually passionate about impact investing, which is related to, but significantly different from, “that ESG stuff.” ESG (environmental, social, and governance) investing is well-intentioned and has positive aspects. However, I believe that despite its benefits, it has serious flaws and has been weaponized in some cases, actually producing far more harm than good. As I have worked in the faith-driven investing space and followed the latest research on investment philosophies and outcomes, my conviction has grown stronger that impact investing, rather than ESG, has the greatest potential to promote human flourishing and accomplish the United Nations Sustainable Development Goals (SDGs). Also, as I have continued to study the Scriptures, I believe impact investing surpasses ESG investing in faithfully testifying to the Kingdom of God. So, to answer my new friend who assumes that I am “involved with that ESG stuff,” my honest response would be: ESG investing is good, but I am committed to promoting impact investing as it more effectively testifies to God’s Kingdom by:
Possessing less risk of greenwashing and fraud
Providing investors with more direct stewardship over the flow of funds
Promoting investment dollars be designated to specific and measurable outcomes
Providing more accountability, transparency, and assessment of UN SDG progress
ESG investing is a philosophy where “investors consider environmental, social and governance criteria alongside traditional financial factors. It represents a more holistic approach to investing that takes into account our impact on the natural world and society, as well as any potential financial gains.” As followers of Jesus, I think we all would agree that this is a good and noble approach to stewarding the resources God has entrusted to us. ESG investing has been extremely successful in shifting the focus of investors and companies away from solely maximizing their financial gains and has expanded their considerations to include the effects their resources and operations have on people and our planet. However, I believe this well-intended philosophy has unintended second and third order effects that may result in negative and even dangerous outcomes.
The greatest challenge with ESG investing is that the standards by which to define and assess the environmental, social, and governance aspects of an organization or investment are extremely subjective and liable to coercive and/or political tactics by the powers that be. As goes public sentiment or the political landscape, so goes the standards for assessing ESG excellence. A current example of this scenario is ExxonMobil. In 2021, under the banner of ESG responsibility, activist investors demanded that ExxonMobil drastically reduce its production of hydrocarbons and rapidly move toward carbon neutrality. When the board adopted this strategy, the company’s stock dropped significantly, but the move was applauded by the broader investment community as a bold and radical step toward improving our environment. However, Russia’s invasion of Ukraine in 2022 exposed the fragility of the world’s energy security and demonstrated that ExxonMobil’s ESG policies must include measures to expand energy development and production in parallel with reducing demand for hydrocarbons.
Beyond its subjectivity, the most frightening aspect of the ESG philosophy is its capacity to be weaponized. We see this in the “cancel culture” of our day, where organizations or individuals that are viewed as being outside the permissible boundaries (as defined by those in power) are ostracized or punished. If a company is viewed as not “green enough” or not “diverse enough,” investors are encouraged to divest their assets in the company and align their resources with “more acceptable” organizations. In China, the ESG approach has been applied to individuals, and each citizen is given a “social credit score” based on their level of compliance to the Chinese Communist Party. This practice has led to financial penalties, prison, and even execution for individuals who were deemed threats to the regime. With the development of Central Bank Digital Currencies (CDBCs) combined with social credit scoring, one can imagine almost unchecked powers by the State to restrict individual’s financial freedoms and seize their assets.
While these examples may seem extreme or alarmist, I maintain that it is important to assess the downstream consequences of our beliefs and practices. The desire for intentionality and responsibility in the environmental, social, and governance aspects of an organization is a good thing and can be implemented in beneficial ways. However, I believe the ESG philosophy is inherently flawed and insufficient to produce the holistic and enduring flourishing we desire to see in our organizations and in our world. Impact investing, while not perfect, possesses a greater ability to promote holistic prosperity without the risks associated with ESG investing.
A good definition of impact investing is “investing with the intention to generate positive, measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets and target a range of returns from below market to market rate, depending on investors' strategic goals.” The primary difference between impact and ESG investing, which I believe is key to avoiding ESG’s pitfalls and promoting creation’s flourishing, is that impact investment dollars are designated to achieve specific and measurable outcomes. Rather than directing companies to aspire to the vague and esoteric notion of being deemed “responsible” according to a shifting and fickle set of standards, impact investments align capital with unambiguous goals that can be quantitatively assessed. A fitting analogy is carpet bombing versus laser guided missiles. ESG investing is like carpet bombing, where you may hit some intended targets, but there is significant unintentional collateral damage. Impact investing is like using laser guided missiles, which are extremely precise and produce only their desired effect.
ESG investing focuses on identifying and analyzing specific characteristics of an organization and determining the associated risks and hindrances these factors represent to the maximum financial return on investment. Impact investing emphasizes the specific positive outcomes that the investment will empower the organization to accomplish. These goals are often developed in collaboration between the investor and the organization, so they are not subject to the whims of public opinion or the dictates of a regime. Also, these desired outcomes are precise and have well-defined measures of success mutually agreed upon by the investor and the organization. Companies receiving impact investments are expected to provide regular updates and progress reports, and this data provides accountability and transparency between the companies, investors, and third parties. This reporting practice also reduces greenwashing or the fraudulent use of funds and enables monitoring organizations to measure and assess progress being made toward the achievement of the UN SDGs.
All the positive aspects of ESG investing can be encompassed within impact investing, without assuming ESG’s inherent faults. Impact investments promote environmental care, social flourishing, and excellent governance, and they do so by defining specific criteria to measure and assess the effectiveness of the investment to achieve these goals. ESG is a nebulous philosophy that is vulnerable to perversion and corruption. Impact investing more effectively empowers faith-driven investors to faithfully steward our calling to bear witness to the Kingdom of God because it possesses less risk of greenwashing and fraud, provides investors with more direct stewardship over the flow of funds, promotes investment dollars be designated to specific and measurable outcomes, and provides enhanced accountability, transparency, and assessment of UN SDG progress.