Читать книгу ESG Investing For Dummies - Brendan Bradley - Страница 73

It will come as no surprise that, while generating wealth for investors, economic activity also creates externalities or impacts. The majority of externalities are negative! They also have associated costs that aren’t entirely covered by the entity that creates them. In particular, a negative externality assumes an indirect cost to the public that causes harm to people in the surrounding area; one example would be toxic gases that are released from chemical firms or mines. Rather than the company paying for the cleanup, the public or local government has to bear the indirect cost to clean up the problem.

Internalizing, or managing, the externality means shifting the burden from external to internal. This is generally achieved through taxes, which are levied when the externality reaches a certain point and a “penalty” is imposed, thereby discouraging these activities. Conversely, government can provide subsidies to stimulate activities that address the problem, such as limiting the effect of externalities on the community.

However, because regulators don’t always have full information on the externality, it’s difficult to impose the right penalty or subsidy. Moreover, historically, externalities have continued because of the lack of information needed to recognize them adequately. Therefore, as externalities become more transparent, they should be easier to internalize, creating the link between ESG factors and financial returns. Policy changes will require companies to reflect the cost of externalities in their business models. This generates a risk to future returns for investors, but is it acceptable for them to “turn a blind eye” to such activities? Investors are now aware of the potential cost of litigation for failing to protect their investments against environmental risk and have been placed in the spotlight for not building such risk considerations into their investment decision-making.