Do you really want to change the world with ESG investing?

“I would like to shift our thinking about responsibility instead of just dividing the pie, so it’s fairer, to actively creating value by growing the pie,” Edmans said. He added that the traditional practice of trying to redistribute equity doesn’t work because companies typically don’t follow through if there is no profit.

“It’s not about giving society more of what already exists, but it’s about innovating towards excellence by actively creating value,” he said. “That’s the power of ESG investing: trying to think of things that create social value rather than directly generating profits. Ultimately, you might be able to monetize it.

Edmans said companies that “tick” all the ESG boxes don’t necessarily beat the market. Those who tick certain boxes, but do it well, are generally more successful. He suggested that investors define what is important to them and choose companies that meet that criterion, then do a “net benefit test” to see if the companies offer more good.

Edmans said investors should consider excellence, which is not a traditional ESG yardstick, but one of the essential things a company can do to serve society. “By being great at something, it can help thousands of people around the world,” he said.

Next, investors should consider the company’s comparative advantage in order to focus on companies that have the expertise to make a difference. “Companies that create value, if they focus on materiality and comparative advantage, end up being profitable in the long run,” said Edmans. Leaders who use their resources to change society do more good in the long run, so supporting them opens up more possibilities.

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