In this post, I argue that the EA community is missing out on an opportunity for outsized impact: working on ESG (Environmental, Social, Governance) investing. A separate post goes into more detail about how this would work.

Summary:

• ESG investing is currently not high-impact, but it could be
  • There is an excessive focus on negative screens of publicly traded equity holdings, but negative screening of debt and forceful, evidence-based engagement could be significantly more effective
• Importance: the $100trn opportunity
  • Most of the big issues EAs care about -- indeed most of the economy -- is driven by corporates; thinking of climate change, for example, 80% of emissions can be traced back to just 167 large companies
• Tractability: ESG/responsible investment is taking off and ripe for improvement
  • Although the field has been a niche enterprise for decades, at its current scale and growth rate it can still be shaped, and greater interest in debt, engagement, and universal ownership present opportunities
• Neglectedness: impact-motivated ESG investing is neglected
  • Not many people in the space seem to be focusing carefully on how to ensure that ESG investing *actually* makes the world better; the vast majority of ESG investing centres around mitigating risk to companies or portfolios
• The EA community has historically neglected ESG investing
  • There’s been a focus on individuals’ investment choices, but this post’s claim is about systemic change and this has not yet been fully addressed in the EA community
• ESG investing may present opportunities for those Earning to Give in finance
  • Those earning to give in finance can still earn good money and donate if they work on ESG matters; indeed, it might even present opportunities to give better
• What should I do if I want to take action?
  • A separate post sets out career paths to consider

This is not an article for individual investors. The claim is not that there are currently good, easy options for investors to easily have an impact. 

This article is for those thinking about their career. The claim is that it’s possible to *create* a world in which investors could have a positive impact with their money.

Terminology: ESG stands for Environmental, Social, and Governance. I use the term ESG investing roughly synonymously with responsible investing or SRI (Socially responsible investment), although some argue there is a distinction. The EA community is more familiar with the term impact investing; in principle this simply means investments made with the intent to generate a positive impact; it may also connote investor willingness to compromise on return in order to achieve impact, and is seen by some as a niche part of the investing world.

[Huge thanks to a number of people for helpful conversations and for reviews of various drafts of this post; particular thanks to Ellen Quigley for a number of helpful conversations, and many many helpful comments and improvements to this post. Also many thanks to Eric McKay, who highlighted to me the importance of engagement. Thanks also to Jonathan from TPP, Marek, Meg, Grayden, JueYan, Ashok from EMIA, and others. Any errors are mine]

ESG investing is not high-impact, but it could be

A separate post sets this out in much more detail, but here’s a brief summary

• The sector is currently heavily focused on “impacts inwards”. I.e. the risks to a company (as opposed to “impacts outwards”, or the risks that the company causes)
• A concept called universal ownership can help us include outwards impacts more
• ESG investment is currently heavily focused on climate change; there appears to have been little systematic thought on the question of which cause areas are most important for responsible investors

Excitingly, ESG investing could have a material impact on climate change and other cause areas over the near- to medium-term.

For a longer term, more hits-based approach to what careers could achieve, a possible end goal is a fundamental improvement to our model of capitalism. It would mean that the effort and energy that currently go into understanding profit are also applied to modelling externalities, both positive and negative. While I consider this vision to be exciting, I also consider it something of an unlikely moonshot.

Importance: the $100trn opportunity

Sizing the opportunity in terms of dollars is tricky -- I chose the $100trn figure because that’s the amount signed up to UN PRI (UN Principles of Responsible Investment -- a UN initiative). Note that referring to the UN PRI is not a claim that the PRI is currently effective at making the world better; the claim is that the scale is large.

However measuring this in terms of the amount of assets is less interesting than considering the potential effects.

Most of the major x-risks (existential risks) or GCRs (global catastrophic risks) that EAs care about are linked to corporates (or entities funded by the world of finance) in some way, and often in a crucial way:

• AI risk: heavily linked to private companies such as Alphabet and Facebook
• Risks to animal welfare: factory farming is driven by corporates
• Climate change: driven by a combination of fossil fuels, agriculture, transport, and a few other factors -- i.e. largely driven by corporates; 80% of all emissions can be traced back to just 167 listed companies
• Nuclear wars and great power conflict: financiers can single handedly eliminate the lobbying power of listed defence companies, thereby reducing pressure on governments to engage in military spending and new conflicts
• Engineered bio risks: engineered bio risk is often linked to biotech firms
• Natural bio risks: major risk drivers for zoonotic disease are deforestation and agricultural practices as well as flights

The idea that corporates are important is not novel within EA thinking:

• Hauke’s post on C-GCRs also argues that corporates cause substantial externalities, and that their power is increasing exponentially.
• Furthermore, the 10 most harmful jobs according to 80,000 hours are mostly dominated by work for corporates.

Importantly, investors don’t just have influence on companies; they can influence governments too, for example by reducing lobbying pressures on governments from corporates. Investors can have less direct influence on governments in their capacity as providers of finance to governments, since governments have access to other sources of finance (apart from the capital markets) and are accountable to other stakeholders. 

Almost all of the good things and bad things that EAs are interested in can be influenced, sometimes substantially, if the holders of the purse strings are no longer indifferent to their value.

As expanded on in a separate post, those working in ESG investing at the moment are heavily focused on climate change. If those who have thought carefully about other cause areas also start working in the space, it presents an opportunity for other cause areas to be brought to the fore.

Tractability: ESG/responsible investment is taking off and ripe for improvement 

The key points around tractability are:

• Right at this moment, ESG investing and responsible investing are really taking off, which adds to the tractability of making progress in this space
• There are tractable improvements that can be made that will make ESG investing more effective
• There remain a number of challenges

Commentators argue that ESG is changing the world, and that there’s been a revolution whereby investors increasingly have ESG at the top of their mind when investing. This review argues that this moment is a fundamental paradigm shift. All the major credit ratings agencies now consider ESG factors in their ratings, with S&P, for example, noting a “heightened focus on ESG” which “has only emerged recently”. BlackRock’s CEO Larry Fink famously writes an annual letter that in recent years has increasingly referred to the importance of climate change.

The ESG/responsible investing space is currently growing significantly. This means we’re at a critical moment in which thoughtful people can shape the way it develops. It’s crucial for rigorous, impact-focused thinking to guide the sector before warm-glow thinking and lip service divestment become ossified.

In a separate post I set out some tangible ideas for what can be done to make this area more effective, including more focus on engagement in equities, more emphasis on negatively screening debt, and a concept called universal ownership. This post also sets out some challenges, including the apparent limits set by a thing called fiduciary duty.

Neglectedness: impact-motivated ESG investing is neglected

There are many people working in finance. Of those working in finance, many don’t see it as their mission to consider the harms (or benefits) that companies/entities are causing to the wider world.

There are increasingly many people working on ESG/sustainable/responsible finance. However many of them believe that ESG finance should only be about “impacts inwards” -- i.e. about the fact that if a company causes harms, this might end up making the company less profitable, as opposed to intrinsically valuing the harms caused.

This means that work explicitly on “impacts outwards” (i.e. the benefits/harms that companies/entities cause) is neglected.

The EA community has historically neglected ESG investing

First, a bit of history. “The original prompt to do good from the EA community was: did you know that with just giving 10% of your income you can save a life or even multiple per year?” (as one EA Forum contributor put it). Lots of EA thinking is focused on questions about what I, an ordinary individual, can do.

The EA community has been cautious about divestment and impact investing, and rightly so, but these discussions have focused on the question of whether I, an individual, should divest.

Discussions of whether a career working on ESG investing could have impact have been rare in EA. I suspect that the well-placed caution about an individual investor’s ability to have impact has seeped through and coloured the anticipated answer to a different question: can I, alongside other EAs in finance, help the whole sector be more impactful? 

I understand that 80,000 hours has not devoted much attention to this question. 80,000 hours wrote in 2013 that by working in impact investing you would likely be influencing 10-100x as much money as you could donate yourself. It’s certainly reasonable for 80,000 hours not to have anticipated how the ESG investing space would grow between then and now.

However, nonetheless, I would argue that the EA movement has neglected the question of how effective it is to change the ESG investing system, despite the fact that effective altruists love systemic change.

This post argues that we are missing an opportunity. 

It’s great for EA to influence the world of charitable giving, and I’m glad that organisations like GiveWell, Founders Pledge, and SoGive (full disclosure: I founded SoGive) have been doing great work to improve the impact of donations. 

However less than 5% of the economy is governed by the charity sector. 

Is it really right that so little of the EA community’s efforts are focused on improving the impact of the 95%+ of the economy that is not philanthropically funded?

Let’s say we took the 95%+ of the economy which is non-philanthropic and excluded the government funded element (government spending typically constitutes something like 30% of GDP) -- and it seems harsh to give zero credit to finance’s ability to influence governments for the better -- the key point about scale still stands. In the grand scheme of things, finance can influence a much larger element of what humanity does than philanthropy can.

Luckily, the core observation that drives the importance of ESG finance is the simple fact that money is a useful resource. This same observation drove the interest in Earning To Give, which means that the EA community already has several people working in finance, many of whom will already be well positioned to take advantage of this. While many of them are working in trading (which, for many trading roles, is not the ideal part of finance for ESG investing) the EA community is still unusually well-equipped with both finance skills and impact thinking.

ESG investing may present giving opportunities for those Earning to Give in finance

A comparison between earning to give and working on ESG investing is something of a false dichotomy -- most career paths in ESG/responsible investing will be well-remunerated, albeit not necessarily as much as other areas of finance.

This means you can continue to donate to GiveWell-recommended charities and save lives.

In addition, being in a career that is both high-impact and well-remunerated could present opportunities. For example, you may be able to identify opportunities and be a more “activist” philanthropist; it may be possible to identify gaps/new ideas in the course of your work, discuss your ideas with others in the community and NGOs, and then fund NGOs to act on those gaps. While this approach to philanthropy is more work than simply relying on GiveWell, and would need to be executed with care, it could (in the right circumstances) enable your donations to go much further. Furthermore, given that it may synergise with your day job, it might not be *that* much more work to engineer these giving opportunities.

What should I do if I want to take action?

There is a separate post that proposes different possible careers paths to consider.