With the increasing popularity of environmentalism and social activism across the nation, Princeton developed a Sustainability Action Plan, which expresses the University’s intention to achieve net zero greenhouse gas emissions and reduce water usage, among other “action items.” In 2022, the University’s Board of Trustees voted to dissociate from 90 companies in service of its long-term zero emission goal. Despite this, many on campus, like Divest Princeton, argue that it is not enough and call for “Princeton University to FULLY and urgently divest our endowment from fossil fuel companies.”
ESG (environment, social, and governance) investing has served as a source of division in the management of large public holdings of capital throughout the nation. These facts beg the questions: What is ESG investing, and how could it impact the Princeton endowment?
ESG investing evaluates companies based on their impact on a variety of social and environmental issues, ranging from pollution and deforestation to DEI (diversity, equity, and inclusion) programs to human rights issues. ESG priorities have become increasingly popular with universities and other non-profit organizations.
The “E” in ESG investing stands for “environment.” While some ESG investors attempt to evaluate the complete environmental impact of the companies in which they invest, particular focus is often placed on the carbon emissions of corporations. As concern grows about the impact of carbon emissions on global warming, some are calling for companies to report their carbon emissions. In fact, the British government now requires corporations to report and pay penalties on carbon emissions; however, these reports are costly to compile and can impose major restrictions upon UK companies.
Currently, the U.S. lacks a standardized corporate carbon reporting policy, and as such, it can be challenging to fairly evaluate the emissions corporations; however, some advocates are calling for a standardized policy. The most logical way to do so would be to make publicly traded companies list their carbon emissions on their SEC documentation. Aside from being expensive, this solution has a major issue: only publicly traded companies are regulated by the SEC and private corporations have no robust formal system for reporting financial data to regulators. As such, an SEC reporting system would give privately held companies an unfair advantage over their public competitors, and creating a similar style reporting system for private companies would be significantly more costly than creating one for public companies as limited public accounting standards currently exist for private companies.
The “S” in ESG stands for “social,” advocating for companies to pursue social values in their decision-making, like human rights, workplace diversity, and employee welfare. With this in mind, some are calling for companies to transition from a shareholder-focused model to a stakeholder-focused model, emphasizing the impact of the company on all individuals, particularly its employees. Large German corporations have employee representation on their equivalent of their board of directors, and many are pushing for American corporations to do the same, despite the generally poorer economic performance of German companies.
The “G” in ESG stands for “governance.” This component focuses on how the leadership of the corporation and its shareholder ecosystem is structured. The term “governance” is broad but often involves investigating the ethical performance of corporate leadership by examining what their goals for themselves and the company are, other than maximizing profits.
Investors use ESG metrics for a variety of purposes. Some use ESG principles because they believe these investments will generate higher returns as they believe the ESG virtues will be the face of future corporate business, while others use ESG metrics to actively maximize the impact of their investments, even if it impacts their bottom line.
There is currently no uniform standard for measuring ESG performance, and the Securities and Exchange Commission (SEC) does not mandate what sustainability information companies must disclose. As a result, companies can decide what information to make public and what to keep confidential in order to create a “greener” public image. Thus, many companies have tried to greenwash their initiatives to seem more environmentally friendly in order to boost their ESG status and access financing available to ESG initiatives. In 2022, Deutsche Bank’s headquarters were raided after the German government suspected that the company misled investors about the “greenness” of its investment vehicles. Many firms have also started to implement ESG principles in their business practices, sometimes without informing investors.
Some argue that ESG is smart investing, as green technology appears to be the power of the future – especially considering the diminishing costs of solar energy and the implementation of more government incentives to switch to clean energy alternatives. Others contend that, because data indicates that ESG assets generally generate lower returns than traditional asset classes, implementing ESG initiatives violates a firm’s duty to make decisions in the best financial interest of their clients.
Alongside the University’s announcement of its dissociation from 90 companies in service of its net zero emission goal, the University’s Investment Company (PRINCO) promised to get rid of its holdings of publicly traded fossil fuel companies. At the moment, PRINCO evaluates its performance strictly on the return of its investments. While many wish for Princeton to maintain this strategy given the endowment’s historically high performance, the extent to which PRINCO’s investment strategy will evolve to embrace ESG principles remains to be seen.
(Photo courtesy of Princeton University’s Office of Sustainability)
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