Should Potential Investors Exit or Invest?

Companies are becoming more responsible as a consequence of the combined efforts of investors and customers. It is no secret that large corporations are the primary source of pollution. As a result, the ecology has suffered severely, and things must be rectified as quickly as possible. According to studies, little efforts by consumers, potential investors, and stakeholders have led firms to become more thoughtful and responsible. A growing number of businesses and mutual funds are becoming increasingly involved in ESG. Here’s what the Chicago Booth Review’s article on the issue has to say, based on the conversation between The McKnight Foundation’s Elizabeth McGeveran, David Swift from investment fund Engine No. 1, and Booth’s Luigi Zingales.

Exit or invest

When it comes to potential investors’ increased interest in ESG, Luigi believes that one of the most commonly assumed reasons is that ESG is an excellent predictor of long-term stock performance. However, Luigi disregards the rationale. ESG, according to Luigi, is just a directional bet that potential investors would want to make. The fact that this gamble may or may not have beneficial collateral consequences for the environment is not decisive, but it may potentially bring success. Luigi then explains the two approaches that potential investors or stakeholders might undertake. According to the article, the two approaches are the deontological approach and the consequentialist approach. Whereas the deontological method is focused on determining if an action is good or wrong according to a set of principles rather than on supposed outcomes, the consequentialist approach depends primarily on caring about the consequences. The article also focuses on a few approaches that prospective investors might use to further their interest in ESG. The two strategies, according to Luigi, are exit and voice. Exit signifies divestiture if you are an investor. The alternative, speaking up, is voting at a shareholder meeting or working with management to effect change. If a portion of prosocial investors chose to divest rather than engage, the prospects of achieving a majority in any prosocial shareholder meeting diminish. However, if a small number of prosocial investors attempt to participate, the effect of divestment will be undermined since participation requires votes, and votes require ownership. According to the article, there is an essential trade-off here since if you are a prosocial investor, you must collaborate on a plan. Finally, the article mentions that while departure obviously satisfies the first two motivations, the consequential approach leads more to justify voice.

Potential investors must be extremely cautious about what they invest in and how they invest and demonstrate their interest in a project. The above mentioned are a few pointers for potential investors to consider before investing in ESG.