Aswath Damodaran: It’s Time to Retire the ESG Concept

The fiercest adversary of investing based on environmental, social and governance (ESG) is Aswath Damodaran. ESG is a failure, its advocates are to blame, and the concept should be retired, according to Damodaran.

Damodaran is a professor of finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. He was a keynote speaker yesterday at the Morningstar Investment Conference in Chicago.

Damodaran is known as the “dean of valuation” for his analysis of security prices. He touched on the topic of valuations, but his most provocative remarks were about ESG.

Once the “S” was put in the middle of ESG, the concept was doomed, he said. It is impossible to achieve a consensus on any social issue, much less the full range of socially responsible concerns that permeate the ESG landscape.

Indeed, the fundamental issue for Damodaran is that there is no consensus about what constitutes “good” or “bad” companies when it comes to ESG. (We have written about this issue in Advisor Perspectives.)

Advisors are putting trust in a scoring system that companies will “game,” he said. “We created a scoring system that makes us feel we are doing good rather than a system that does good.”

“The best thing would be to retire the concept,” he said.