ESG Business Evaluation and Investments

The common adage of “voting with your dollar” is an important concept when it comes to environmental finance. Stockholders primarily control corporations because they elect the directors who select the managers to run the business (Ross, Westerfield, and Jordan 2015, 6). By participating as a stockholder, individuals can provide influence on the ultimate goals of a business. There are many different financial goals a business can focus on like beating the competition or maximizing profits (Ross, Westerfield, and Jordan 2015, 8). However, more investors and businesses are turning towards the concept of Environmental, Social, and Governance (ESG) metric frameworks to ensure long term sustainability of their business and to help ensure business decisions are improving stock value (Kremenstein 2018, 0:16).

Kremenstein does a great job of explaining the strengths and weaknesses to stock value and stockholders for businesses that choose to emphasize importance in the different aspects of the ESG business evaluation framework. Companies like Equifax and Facebook were not included in ESG exchange-traded funds (ETFs) due to their poor cybersecurity and data privacy aspects. These companies later had large stock drops due to those risks materializing and impacting their businesses (Kremenstein 2018, 4:10). Often stockholders are choosing to completely divest from fossil fuels and other polluting industries to avoid funding these environmentally disastrous companies. However, this may not be the best method for most of these industries because by no longer having a shareholder voice, individuals are no longer able to be part of the conversation around important corporate goal topics since they no longer have control over the corporation (Kremenstein 2018, 5:38). I found this idea quite profound in how it related directly to Ross, Westerfield, and Jordan’s (2018, 6) statement that “stockholders control the corporation.” While on the surface, divesting from fossil-fuel based energy companies sounds like the best way to utilize investments, divesting removes individuals’ ability to be part of the driving force to change the company to move towards more renewable sources. A better approach may be to retain those positions and guide the companies to better renewable investments. Overall, this interview highlighted the importance of looking at a framework for different metrics that lead to stock value success and how corporate structure is important to understanding the mechanisms available to make environmental improvements through financial decisions.

Author: Logan Callen

References

Kremenstein, Martin. 2018. Interview by Sara Silverstein. The Bottom Line. May 7, 2018, Business Insider. Video, 9:03. https://www.youtube.com/watch?v=4LPRQaG83Ls.

Ross, Stephen A., Randolph W. Westerfield, and Bradford D. Jordan. 2015. Fundamentals of Corporate Finance: Standard Edition. 11th ed. New York: McGraw Hill/Irwin.