Ideas

An Yan, Ph.D.
“Based on my latest research, it looks like firms are starting to do the right thing when it comes to ESG, so we need to avoid overreacting to all the recent pushback and recognize there have been some positive developments in ESG practices,” explained Yan, who’s studied how companies manage ESG for more than two decades.
Financial markets began considering ESG as an investment framework in the early 2000s, rating a U.S. company based on its practices and policies and its potential environmental and societal impact. ESG has fallen out of favor in the past few years, increasingly being criticized for its lack of measurement standardization, unconvincing returns, and selective enforcement. These criticisms may be justified, according to Yan, who described early domestic ESG efforts in many firms as little more than “window dressing.”

For example, Yan’s research into electric power firms at the time showed that their qualitative environmental ratings increased shortly after a significant environmental disaster but reverted to pre-accident levels a few years later, a pattern not mirrored in their social ratings. Similarly, Yan found that regulated banks responded to the 2010 Dodd-Frank Act’s risk-reducing measures by “engaging more on governance and less on social initiatives” compared to their non-regulated counterparts.
But this opportunistic approach to ESG could be changing if his current research into the Paris Agreement is any indication.
When the U.S. joined the international treaty on climate change in 2016, the environmental ratings of domestic corporations increased overall while their social ratings declined. The U.S. withdrew from the Paris Agreement the following year. When it rejoined in 2021, environmental performance in U.S. corporations improved without negatively impacting social ratings as it had five years prior.
This decline in opportunistic ESG management may result from the financial market’s increasingly sophisticated approach to ESG or may reflect growing environmental and social consciousness within U.S. corporations.
Yan isn’t ready to draw any firm conclusions just yet, but he remains cautiously optimistic.
“Firms appear to be taking a more strategic approach, rather than trading off one ESG pillar for another,” he commented. “We need to do more research, but ESG management could be moving in the right direction. We need to do what we can as an industry so that we can continue moving forward.”