Fundamental dichotomy between ESG investing and profit maximization: Nobel laureate

Amid greater efforts at pushing capital into more responsible avenues, Nobel laureate Eugene Fama on Tuesday said there is a fundamental dichotomy between investors' profit-making objective and what is called as environment, social and governance (ESG) investing. The American economist, who is best known for his work for efficient markets, said virtue (of responsible investing) comes with its own rewards and investors should not expect higher returns on such moves.

He said even the regulators, including in the more sophisticated and aware markets in Europe, are yet to think clearly on this matter. It can be noted that the remarks come at a time when ESG investing is fast gathering pace, given the pledges made by corporates for the long-term good of the planet.

The 81-year-old Fama, who won the coveted Nobel Prize in 2013, said we need to ask if people are willing to pay more for products and services which comply with the ESG paradigm and also understand that as a select few stocks keep getting purchased, their prices go up and eventually, the returns made by investors go down. "The issue really is – are people willing to pay more for products that are produced environmentally friendly way?," he said, while speaking at the R H Patil Memorial Dialogue organized by NSE.

In the conversation with banker Uday Kotak, he said, "The other big issue is – how do you manage in a world where you have ESG goals, as well as profitability goals?" Seeking to summarise the scholar's words, Kotak sought to know if the point is about how the "fundamental dichotomy between investors' expectations of returns versus the objectives of ESG need to be better thought through for the future" and got an answer in the affirmative. Fama added from a returns perspective, committing a sin is better than the virtue of being a responsible investor.

On the upcoming Presidential election in the US, Fama said while Democrat Joe Biden may win the poll, his ability to usher changes depends only if he gets a majority in both the Houses – Senate and the House of Representatives. At the moment, the market seems to be believing that Biden may not get a majority in both the Houses, Fama said, making it clear that he is not into predicting results.

Meanwhile, speaking at the same event, NSE managing director Vikram Limaye said it is important that trust in markets is enhanced and we further integrate the Indian economy and markets into the global ecosystem. "In order to achieve sustainable economic growth, it is critical that we expedite market development and capital formation," he added.