Do ESG Investors Help the Environment? Response to Freakonomics Radio – by Torrey Byles

In a recent podcast from Freakonomics Radio (, a position was taken that the trend in ESG investing may be misguided. A research paper by a Yale business professor was cited as showing that it may be better to provide financing to heavily polluting companies -- "brown" companies -- to help them fix their negative environmental impacts, or even "transition" out of their current business into "green" businesses. ESG investors, the professor held, were naive in thinking that they will change the behavior of firms by disinvesting in them. 

Here is my response to the podcast (which I sent to the Freakonomics radio show). 

In the podcast, your secondary speakers after Shue -- Chris James and Tony Will -- made the more compelling insights, and showed the shallow "positivism-nominalism" of Shue's claims. These are, first, her very incorrect way of using pollutant-per-revenue as the classification criterion of brown vs green. Second, that revenue size scales proportionately and across sectors to some homogenous entity as "corporate profit-making activity", as if all corporate processes are the same.  

Like what you may expect from a business professor, she doesn't really understand that money & credit (financial capital, if you want to call it this too) are less a measure of value and more a means to action; less descriptive/designative, and more "commands" to action and performance. 

She accuses green investors of committing a psychological delusion (and many do), but she doesn't recognize her own delusion concerning money & credit. She's committing the "veil of money" illusion. 

Engaging brown companies is a good idea if you want to connect financing solutions to engineering solutions. But there is only so far that financial assistance cum engineered "greeness" will go.  And taking an ex post, "top down" finance approach, instead of an ex ante bottom-up engineering approach is the wrong way to solve the problem. 

Tony Will is quite clear how this works. And it is because he sticks quite closely to actual, real details of financing, engineering and resulting environmental effects. 

You have to (1) have a better criteria for differentiating "brown" and "green" than Shue's confused approach. Both James and Will said this. And (2) you have to take into account the specific material production activities of each corporate actor, as Tony Will alluded to. In other words, you have to take a sectoral approach to seeing how financial assistance channelled to the relevant engineering solutions will bring about desired effects for specific kinds of industrial-transportation activities. 

And moreover, it must be kept in mind that when all is said and done, the "market" isn't going to magically deliver, as if by an invisible hand, the elimination of fossil fuel pollution until there is an absolute prohibition from burning fossil fuels beyond a physical limit that the atmosphere can absorb and break down. 

Shue is a business professor in the grip of neoliberal psychological delusion. That's the "behavioral economics" angle of her story, in my opinion.