The Conversation - How to improve sustainability investing

If you pay attention to investing, you’ve probably seen ESG funds and ratings. About one-third of all investments under management right now use these sustainability criteria, including a lot of pension funds. ESG ratings look at companies’ performance on environmental, social and governance issues on the theory that companies that manage those issues well are well managed overall so are likely to make money for investors.

But a good ESG rating doesn’t necessarily mean a company is a good steward of the environment. Managers of the S&P 500 ESG Index set off a roiling debate over the value of ESG ratings last week when they dropped electric vehicle maker Tesla from their index while keeping the oil giant Exxon. A few days later, the U.S. Securities and Exchange Commission voted to propose new ESG disclosure rules.

Tom Lyon, a business economics professor at the University of Michigan, explains what happened and offers three ideas for how to make ESG investments better reflect investors’ expectations.

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