ESG

ESG stands for the three key areas of responsibility: Environmental, Social, and Governance. ESG serves as a standard for sustainable investing and makes it possible to measure a company’s performance beyond purely financial balance sheet figures.

The environmental aspect focuses on factors such as climate protection strategies, the reduction of greenhouse gas emissions, the protection of biodiversity, and the efficient use of resources. The social aspect encompasses factors such as workplace safety, fair compensation, respect for human rights throughout the supply chain, and diversity within the workforce. Finally, governance examines corporate management structures, compensation transparency, anti-corruption measures, and the independence of the board of directors or supervisory board.

ESG investments in liquid markets, such as publicly traded stocks and bonds, suffer conceptually from the illusion effect: those who acquire «better» securities are buying them from another investor on the secondary market. The company itself, however, does not receive any new capital as a result. Consequently, there is no real impact.

While exclusions or the preference for best-in-class stocks reduce the reputational risk for one’s own portfolio, a real reduction in emissions or a direct ecological transformation in the economy rarely occurs.

Accordingly, sustainable investing should not be viewed as a substitute for sustainable action and political decisions. The impact of a portfolio aligned with sustainability criteria is minimal at best and does not provide investors with verifiable long-term excess returns. Read more about this in the blog «Greenwashing: The Limits of ESG and Impact Investing».