ESG: A distraction from climate change?

This was a topic discussed earlier this month by climate leaders at the New York Times Climate Forward conference. According to Bloomberg Intelligence, global ESG (environmental social and governance) assets are likely to surpass $41 trillion in 2022 and $50 trillion by 2025. ESG is increasingly a part of corporate strategy from a risk mitigation and opportunity optimization standpoint.

But the landscape is complex, with little regulation and guidance. This lack of oversight has resulted in the adoption of custom frameworks and metrics, of which it’s reported there are now over 600. Complications are compounded by differing interpretations of the term ‘sustainability’, and companies being compared against their peers in their own industry, rather than looking at wider environmental context and impact. This has resulted in the ESG label being abused by corporates and investors for greenwashing purposes. ‘Anti ESG’ voices have got louder, with the accusation that these standards are nothing more than a ‘marketing decoy’ that gamifies corporate social responsibility.

Climate Forward conference panel member Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship at London Business School (LBS), argued it would be misguided for critics to assume that ESG is the cause of climate inaction and to blame ESG for society’s collective failure to address the climate crisis. “It is calling ESG a distraction that is the real distraction. The underlying problem here is the failure of our governmental, national and international institutions to coordinate climate action.”

He continued: “ESG is not a distraction, ESG is merely a reflection. It reflects the unfolding moral, ethical, sociological processes and debates that are currently taking place. ESG is not only an issue of measurement or disclosure. The confusion around ESG actually reflects ongoing societal debates: about women’s rights, gay rights, racial discrimination, minority rights and so on. These are complex, multifaceted issues that are inherently socio-political. Society is currently polarised. How can we expect ESG to be accurate, trustworthy, reliable and comparable when society at large is still debating?”

Finally,  Dr Ioannou argued that the real distraction from climate action is the “weaponisation” of ESG by the political right based on an emerging, yet false, “anti-ESG” rhetoric. “Let’s be clear, if the ESG agenda had indeed been a distraction, then the political right would have been the first ones to embrace it. It is precisely because the ESG agenda can have a positive impact, that the political right and vested interests are fighting so viciously against it,” he said. 

So, despite imperfections, ESG is here to stay. In March 2022, the US Securities and Exchange Commission (SEC) announced its plans to formulate “a comprehensive ESG disclosure framework,” which is likely to lead to enhanced disclosures and greater transparency.” In the UK, the FCA have scheduled their consultation on Sustainability Disclosure Requirements for later this year. Indeed, all regulation can be seen as beneficial as a precursor to a more robust industry-wide standardisation, a sentiment shared by SI Engage co-founder John Goodchild in our earlier blog exploring the Net Zero Asset Managers Initiative. Focus on social and governance issues, such as diversity and inclusion, fair treatment of workers, transparency and reporting standards of organisations are all beneficial topics of discussion in the interim.

As part of this movement toward transparency and accountability investors will expect quantifiable, tangible goals and results. Penalties for failure to meet ESG targets become more commonplace, and ensure discipline on the issuer’s end while providing an antidote to ‘greenwashing’.

Chile has recently led the way in issuing the world’s first sovereign sustainability linked bond. The proceeds will go towards curbing GHG emissions and promote the diversification of the country’s energy portfolio. The coupons of the bond are linked to specific KPIs and the achievement of its objectives – failure to meet targets will result in Chile paying a set penalty to investors.

Implementing explicit goals enables investors to know what to expect and institute discipline checks as well. It is this process that will allow them to voice their concerns to those who need to hear it, and make the biggest impact through their portfolios.

With SI Engage investment teams can plan ESG engagements, track them against specific KPIs, and quickly and easily generate stakeholder specific reports to evidence progress and achievement. Get in touch to find out how our user-friendly system will be beneficial, with minimal workflow disruption.

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