Business schools are swiftly embracing the teaching of ESG in their courses. However, the subject should be properly integrated into, not separate from, financial theory – while highly technical aspects are best left to the experts
ESG has never been more important for business. There is increasing evidence that certain environmental, social, and governance factors lead to higher long-term financial returns. Moreover, many shareholders have goals beyond financial returns, and are willing to sacrifice profits for positive societal impact.
As a result, ESG has never been more important for business schools. And they’re responding: rushing to launch ESG courses, fundraise for ESG centres and reinvent faculty as ESG experts. Business school league tables are also responding – that of the Financial Times, for example, includes the proportion of core teaching hours devoted to ESG topics, and the number of hours instructing how organisations can reach net zero.
As someone who has worked on ESG all through my career – including writing a book on it and integrating ESG into a long-established and leading textbook on finance – I should welcome such changes. But, as essayist HL Mencken is often paraphrased as saying: “For every complex problem, there is an answer that is clear, simple – and wrong.” And this is the case for ESG teaching.
First, it makes no sense to separate out ESG from non-ESG teaching hours. As I wrote in a recent paper: “ESG is no different to other investments with long-term financial and social returns”; viewing it as a niche category makes it seem siloed and non-core.
Core principles, taught well
The best way to teach ESG is to teach core business principles really, really well. A basic principle of finance is that shareholder value is the present value of all future cashflows. Emphasising this would give a big green light to many ESG projects – such as clean energy, carbon capture, and diversity and inclusion – whose payoffs are mainly in the long term.
Mainstream finance also teaches us that we should only penalise projects for “systematic” risks that are correlated with the rest of the market. In the case of carbon capture, the technology is risky – but whether it succeeds or fails has nothing to do with whether the economy is in a boom or a recession. As a result, executives and investors should not unduly discount such a venture.
Second, rankings based on teaching hours pressure faculty into covering more ESG regardless of expertise. It’s unreasonable to expect everyone to teach how companies should reach net zero: the issue is extremely complex and many solutions are technological ones that should be taught by climate scientists or engineers.
There are certainly business-related elements. However, challenges such as the difficulty in measuring “net” or “zero”, the conflict between net zero and fiduciary duty, and the trade-off between net zero and other ESG issues – such as the 600mn people in Africa with no access to electricity – may well be ignored by a teacher who briefly consults the internet in order to create a new slide. While ESG is important in today’s business world so are other topics, such as data science, machine learning and artificial intelligence. But that doesn’t mean all professors should teach them; instead, these topics are, sensibly, being left to the experts.
Third, it encourages greenwashing. The number of hours devoted to ESG are entirely self-reported, and faculty with least expertise in ESG are most likely to use the loosest definitions. To some, changing an example of a car company to an electric car company, without altering any of the numbers, would count as ESG, as would using a case study with an ethnic minority CEO. Many schools have been pressuring faculty to report as high numbers as possible; as a result, one quadrupled the reported ESG content of one of its programmes.
What’s the solution? Rather than focusing narrowly on teaching ESG content, business schools should focus more broadly on valuing and rewarding teaching in the first place. Most put very little weight on teaching in their hiring or promotion decisions; some even put a negative weight on it by assuming that those who win teaching awards can’t be serious about research.
Schools should invest more seriously in evaluating teaching. Currently, ratings from students predominantly reward entertainment and popularity, and deter faculty from upholding classroom conduct as they’re afraid of receiving the lowest, one star evaluation. Ratings are also given straight after a course – rather than at the end of a completed degree, which would enable students to evaluate its long-term benefits.
Furthermore, there are no ratings based on whether teaching is backed by rigorous academic research rather than generic stories and anecdotes; whether it challenges and stretches students intellectually; and whether the material is practical, current and relevant.
Highlighting the courses that excel in these aspects would inform students which are the ones that will best prepare them for the problems of the future. This should be encouraged by business schools, as well as the organisations rating them.
Alex Edmans is professor of finance at London Business School, author of “Grow the pie: How great companies deliver both purpose and profit”, and co-author of “Principles of corporate finance”. He was named MBA Professor of the Year by Poets and Quants in 2021