ESG — it’s not one thing.

Derek Strocher
4 min readJul 13, 2021


A lot going on under the surface…

The media nowadays is awash with coverage of ESG. From companies doing a great job of managing ESG issues, to those failing miserably and even those attempting to coverup their misgivings through the proverbial greenwashing.
ESG is of course the acronym for Environmental, Social and Governance aspects of business. If your firm is deemed to be doing well on ESG aspects, then you might even find yourself included in an ESG Index, or ESG mutual fund holdings. But who determines whether your firm is doing well — well on what basis?

First, we need to understand what these E, S and G terms mean. By Environmental we mean all aspects of the company’s interaction with the natural world from issues like pollution of waterways, to deforestation, to greenhouse gas (GhG) emissions. A company’s environmental interaction can be positive (e.g., reducing GhGs) or negative (e.g., hazardous waste dumping).

Social aspects of business cover a range of topics from inequalities, to protection of human rights, to the effect of a company’s goods and services on society. Social aspects can also be positive (e.g., providing employment in underserved communities) or negative (e.g., producing goods that lead to societal issues like obesity).

Governance is the structure of a business that leads it to adopt policies and develop a culture that produces other outcomes. Good governance may include an internal system that hires, trains, manages and promotes a total corporate culture aligned with achieving good Environmental and Social outcomes in the operation of the business.

However, having good Governance does not mean that good Environmental and Social outcomes are an inevitability. Likewise, good Environmental outcomes can be produced without good Governance or even without consideration for Social aspects of the business.

The main issue with ESG in general is that E, S and G are three very different aspects attributed to businesses. Trying to group them together in an ESG metric is hopeless. In fact it’s worse than hopeless because it opens the door for manipulation. That issue comes to fruition in two ways.

First, a firm can hold itself high on one ESG area like Governance while at the same time causing Social problems (for instance), and claim to be an ESG stalwart. There is no requirement to perform well on all three measures in order to essentially claim credit for all three, if even superficially. There is no governing body of ESG to referee misuse.

Second is the realm of greenwashing, where firms claim high marks on Environmental factors in one part of their company, while other parts of their company pollute the Environment and atmosphere at will. This is sadly prevalent in areas like Green Bonds, where in cases the proceeds of a new bond issuance are used to invest in some “green” project, all the while the same business is funneling investment into destruction of the natural world. We have seen this with big oil company green bond issuance — a maddening proposition where the very firms materially responsible for Climate Change are given “green” credit for side-projects, rather than seen as the sum of their parts.

So, back to the question of who determines whether a firm is performing well as an ESG beacon. While we have intermediaries that create ESG funds and ESG indexes, we know from experience that many of those are loosely measuring ESG and even more loosely holding companies to a high standard. For example, a number of large banks offer ESG funds that are either wholly or materially invested in US government treasury securities — not exactly the pinnacle of ESG.

There are certainly some intermediaries with track records of assessing ESG well (honestly and rigorously) — but they exist among a field of greenwashing, short-cutting, and convenient misinterpretations and oversights that make the overall landscape difficult for the average consumer to navigate.

Beyond fund managers, an industry of ESG standard setters has cropped-up. Acronyms from GRI, to CDP, SASB, TCFD and others are attempts at frameworks to guide the measurement of ESG. However, none are focused on determining value — how much is enough E, S and G; and are there minimums of each required. None will overcome the issue of some company doing well in one area and poorly in another to derive the “right” ESG score.

Indeed this issue of determining how well a company is doing on matters of Environment, Social and Governance ultimately is a matter for the investor, partner, and employee — the stakeholders. It is a question of firm-by-firm analysis. Using some of those emerging standards we can effectively measure Environmental impact, Social impact and Governance of firms — but doing so independently of each other, not as one “ESG” measure.

Herein lies the future — looking under the surface at independent Environmental, Social and Governance scoring; honest E, S and G fund creation based on sound metrics; and indices that track firms based independently on these factors. The future is companies that create three separate strategies, and are accountable to each of them, rather than one ESG-strategy that creates an opaque view of three critical aspects of a well-functioning enterprise.



Derek Strocher

Chief Financial Officer of Calvert Impact Capital - one of the world's oldest and largest impact investing firms.