By: John Gonas, Professor, Jack C. Massey College of Business

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Investors and wealth advisors are inundated with opinions from financial experts, advisory firms and media outlets regarding the influence of environmental social governance (ESG) ratings on meaningful social impact.

For instance, CNBC recently updated its description of ESG impact to say, “ESG impact offers clarity and context on the complex intersection of business leadership and the capital markets, as corporations reckon with the rising financial risks of climate change, take on the centuries-old struggle of systemic race and gender inequality, and recognize the importance of sound corporate governance as the necessary foundation for creating real and lasting change.”

As the popularity of measuring social impact increases, a variety of media outlets are simultaneously challenging the legitimacy of how ESG ratings truly move the needle on many aspects of social change.

Tariq Fancy, former Chief Investment Officer for Sustainable Investing at BlackRock (who left his post in 2019) questioned the legitimacy and validity of tying ESG ratings to sustainable, meaningful impact (like carbon emissions or gender diversity among senior management) in a recent Vox Conversations interview. Fancy argued beyond the value of ESG ratings on social impact’s bottom line and instead pointed to the essential role and influence of public policy as the most important way to truly impact change.

He raises important questions I often hear among the wealth advisory community:

  • “Can we associate secondary market shareholder activism, through board composition and governance proxies, to metrics that capture sustainable change?”
  • “Does the power and persuasion of primary market funding have stronger or weaker relative influence?”
  • “Do capital market fund flows compliment, strengthen and/or have no significance on public policy tied to intended ESG outcomes?”

Upon listening to his concerns, we can see why many within the industry are interested in better understanding the relationship between widely accepted ESG impacts and measurements to fund flows, shareholder activism or public policy — again, attempting to tie the primary market, secondary market and/or government regulation to a company’s long-term commitment to sustainability.

As impact investing continues to evolve, many advisory firms with “sustainable investing,” ESG platforms and financial products boast greater access and availability of internal and external data. Access to such data may give investors a more transparent and holistic view of how companies resource and measure their environmental and social impact, as well as how third-party firms collect data, conduct due diligence and validate data and appropriately weigh particular metrics to derive/calculate ratings.

A closer look at social impact investing

To address this conversation, the Massey College of Business’s Beasley Center recently co-sponsored our third Annual Social Impact Investing Seminar with Alliance Bernstein. The event’s speakers discussed how publicly-owned companies internally steward resources to accommodate metrics in their own impact reporting — introducing corporate sustainability platforms and responses to ESG scoring across four different sectors.

Thereafter, hearing from S&P Global on its due diligence and ESG rating processes, we offered further insight on the due diligence, data capturing and ratings derivation processes. The final panel was dedicated to how institutional and retail asset managers at Alliance Bernstein are incorporating targeted or holistic ESG portfolio management strategies.

Massey Graduate School of Business offers MBA, MAcc and MSAA programs to help students grow professionally and personally, connecting students to Nashville’s thriving business community. Small class sizes and student-faculty ratio allow students to develop their unique strengths, with faculty selected for both academic and industry accomplishments.

John Gonas, Ph.D., is a professor of finance at the Jack C. Massey College of Business. Gonas teaches Corporate Finance, Introduction to Investments and Investment Management. His teaching philosophy revolves around real-life application of subject matter. Email Professor Gonas to learn more.