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ESG is dead: long live Rational Sustainability!

A new paper is out from London Business School on the needed evolution in ESG investing - and a proposal for a new approach - entitled Rational Sustainability

The author, LBS professor Alex Edmans, notes that we’ve all seen ‘ESG is under attack from all sides’ with multiple objections from opponents, including:

  • ‘…[ESG] allows fund managers to pursue their own agendas at the expense of their clients’ returns’.

  • '…[ESG] replaces clear-headed thinking by implying that it is different from mainstream business...’ such that investors ignore decades of research and ‘resort to "gut feel" when practicing ESG’.  A dynamic we wrote about in a November post.

  • While ESG [issues] may be ‘critical to long-term value [of a company], and thus should be of interest to anyone…’ the term ESG ‘puts it on a pedestal’, causing factions to simply react positively or negatively to the label itself, irrespective of the important issues it represents.

The author notes that true believers in ESG are simply turning to other phrases, like sustainable investing, responsible investing, etc., while opportunistic supporters – those looking to participate in the hype and asset flows that existed around ESG, are closing ESG funds ‘and looking for the next fad’.

So where do we go from here? Professor Edmans proposes a new approach – Rational Sustainability. It is 'sustainable' in that it considers ‘long-term value’, and ‘all factors that create value, regardless of whether they fall under an ESG label…’. It is ‘rational’ in that it ignores ‘immaterial factors even if they can be called ESG’; it ‘recognizes diminishing returns and tradeoffs’, and ‘is based on evidence and analysis…’.


The author builds it around ‘10 features’ – outlined and explored fully in the paper, with a few principals selected here with descriptions:

  • 1… about value creation only – ‘creating sustainable [long-term] profits, companies, economies and societies…[that] should be of interest to everyone’.

  • 5… enabling and clear – ‘the value [rational sustainability] creates can be both financial and social…’ but ‘societal objectives [must be] pursued in a sustainable way, contributing to the performance of the company’, while non-financial objectives need to be clearly stated, defined, measured, and reported on.

  • 8  … considers costs with the benefits of an activity, and the diminishing returns of signing up and complying with more and more ESG type certifications. Green building certifications are used as an example; is it rational to buy a building and ‘get as many certification as possible’ – is each additional certification adding value with the costs included?

Overall, ‘Rational Sustainability sets boundaries. It establishes a framework for analyzing what a company’s responsibilities should and should not be’. Should Apple be held responsible for those left unemployed by BlackBerry’s demise? Should ice cream maker Ben & Jerry’s be held accountable for their corporate mission of using ice cream to ‘change the world’?

This is clearly a first and high-level attempt at a new sustainability paradigm for investing, and I’m left wondering about the ‘pragmatics’ of this approach as we oversee and direct our faith-aligned investable pools of assets. You won’t find pragmatics in this research, rather a hope that Rational Sustainability can fulfill ‘the promise that ESG failed to’.


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