Hardwiring corporate goodness

• Published date: 01 March 2023
• Author: Terrence Keeley
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/jacf.12559

DOI: 10.1111/jacf.12559

ORIGINAL ARTICLE

Hardwiring corporate goodness

Terrence Keeley

CEO - 1PointSix LLC,Amagansett, New York, United States

Correspondence

TerrenceKeeley, CEO - 1PointSix LLC.

Email: Terry@1pointsix.com

This is a slightly edited version of Chapter 10 of TerrenceKeeley’s new book, SUSTAINABLE: MOVING BEYOND ESG to IMPACTINVESTING (New York: Columbia University Press,

2023), pp. 153–168.

Goodness is the only investment that never fails.

Henry David Thoreau

INTRODUCTION

For ESG investing to work as many hope and expect—that is,

as investment vehicles that systematically promote more inclu-

sive, sustainable growth while simultaneously generating at or

even above-market returns—continued progress is needed in a

multi-staged yet broadly interdependent sequence.

To begin with, recognized and universally followed standard

setters like SASB, TCFD, and the EU’s Corporate Sustainability

Reporting Directive must continue to identify and set the right

objectives which corporations must strive to achieve. If they pri-

oritize the wrong material risks or set the wrong methodologies

for measuring them, their essential role in directing corporations

to make further progress on a range of socially desirable objec-

tives, including the UN’s Sustainable Development Goals, will be

compromised.

As these standardized reporting benchmarks are being updated

and improved, corporations must become more diligent about

adopting them, working deliberately toward reducing specified

material risks, and employing best environmental, social, and gov-

ernance practices. They must also follow these new standards

consistently, and keep investors informed about their progress. If

they do not strive to conform to standards like those of SASB and

TCFD, or if they fail to report their ESG investments and initia-

tives efforts accurately, many indexed ESG investment strategies

and the research on which they depend will fail to translate their

efforts into premium stock valuations. No strategy can be any

better than the data upon which it is based. Given Morningstar

reports that US corporations disclose only two-thirds of their gen-

uine, material ESG risks, versus 73% in Europe and 52% in Asia,

when it comes to complete corporate reporting, there is still a long

way to go.

Finally, for capital markets and investors to recognize and

reward ESG progress, bankers and investors must distinguish the

best ESG corporate actors from the laggards. Moreover, investor

scrutiny must be trained on every industry that is part of the

economic value chain—not just cleantech and circular exem-

plars, but also steel manufacturers, cement makers, agricultural

giants, and energy providers. Why? Economic growth will con-

tinue to depend on many carbon-intensive industries. There is

no viable path forward for inclusive growth through a hand-

ful of zero-carbon-emission industries alone. Once every viable

minimum-carbon process has been adopted, moreover, we will

still need to find economical methods for removing unavoidable

carbon emissions from the atmosphere. After all, we will still be

using some carbon-dependent processes and fuels.

By providing patient and loyal capital in a discriminating way,

investors will ultimately assign higher equity valuations and lower

debt costs to the paragons of each industry. This relative valuation

process is needed to complete the virtuous feedback loop upon

which the systematic promise of most ESG investing depends. If

ESG paragons do not end up with higher P/E ratios and lower

costs of capital than laggards, ESG strategies will have failed to

perform their economic function of encouraging bad industries

or players to adopt best practices. In short, for ESG investing

to work, verifiable and verified corporate “goodness” must be

financially rewarded consistently. For progress to be systemwide,

moreover, even “bad” corporations need to believe it is in their

interest to adopt TCFD and SASB standards and seek improved

ESG scores because they believe it will lead to their financial affir-

mation as well as socio-environmental progress. If they do not

consider it to be in their interests or in the interests of their

long-term shareholders, they are highly unlikely to do it.

Clearly, the road to hardwiring corporate goodness I have just

spelled out will be—at best—a long and winding one. It entails

multiple interdependencies. For ESG investment to achieve the

J. Appl. Corp. Finance. 2023;35:45–51. © 2023 Cantillon & Mann. 45wileyonlinelibrary.com/journal/jacf