Aswath Damodaran suggests retiring the ESG concept

Aswath Damodaran, a finance professor at NYU, spoke at the Morningstar Investment Conference this week in Chicago where he criticised the concept of environmental, social, and governance (ESG) investing. Damodaran believes that there is no consensus on what constitutes a “good” or “bad” company when it comes to ESG, and that ESG is a failure due to overselling by its advocates. He argues that ESG investing is simply a scoring system that companies will “game” and that the positive alpha that has benefited some ESG investors is a result of aggressive marketing rather than a sustainable strategy. Damodaran suggests that advisors should understand their clients’ values and priorities and use direct indexing to create a customised portfolio. He also believes that regulating ESG investing will be ineffective and that regulations should focus on individual companies instead. Damodaran concludes that while the intention of ESG investing is to make the world a better place, there are better ways to achieve this goal.