10 things I think about ESG
Posted in GreenBiz
July 11, 2022

10 things I think about ESG

The growing momentum, scope and complexity of environment, social and governance (ESG) investment, corporate policy and reporting has been a signature development across the many topics of recent sustainability conversations.

Yet, 2022 has witnessed significant cracks in the coalition of NGO activists, large asset management firms and investment banks that energized this movement.

The implications of this schism range far and wide. Here are 10 ramifications that I see:

  1. Asset managers and investment banks always had different objectives from activists for supporting ESG reporting and investing. For the financial managers, the goal was always to make more money for their clients using climate and other issues as the means through which to derisk their assets and investments. Derisking portfolios never translated into a commitment to disinvest from fossil fuel investments or address other wide-scale planetary concerns. Activists’ goals differed substantially: to ally with the financial sector to foster the transition away from a fossil fuel-based economy en route to a fuller transformation of both the economy and society writ large to save an imperiled planet.
  2. Russia’s war on Ukraine and the rapid bounce back in economic demand from the pandemic destabilized the economic pillars supporting a broad ESG coalition. Vladimir Putin’s war scrambled international oil and gas markets and led to rapidly escalating energy prices and energy company valuations, while the stimulus packages to combat the pandemic enabled the economy to roar back, powered by consumers flush with cash. This pincer movement reversed a 40-year history of low inflation. As a result, oil and gas companies reaped massive economic windfalls and caused financial managers to view their fossil fuel portfolios as a source of significant asset value for their customers rather than merely a derisking opportunity.
  3. There was no common ESG evaluation methodology that unified financial analysts and activists. When I wrote a prior ESG-themed GreenBiz column in September 2020, various asset managers that I interviewed optimistically stated that a common set of performance metrics would emerge in several years. Such optimism derived from efforts to integrate multiple reporting frameworks including those from the Global Reporting Initiative and Sustainability Accounting Standards Board, alongside efforts launched by the financial community on specific issues such as the Task Force on Climate-related Financial Disclosures. While some progress toward developing unified frameworks advanced, they were challenged by the growing complexity and conflicts emerging from social divisions and political discord.
  4. Political and societal divisions in American society have galvanized expectations for corporations to report on the social and environmental aspects of sustainability without sufficient guidance on how or what to report. Increasingly, employees and customers expect businesses to take a stand on such issues as repression of voting rights, LGBTQ issues, gun violence, access to abortion and the federal government’s authority to regulate greenhouse gas emissions across economic sectors. The recent Supreme Court decision to overturn Roe v. Wade will subject companies to additional pressure to support abortion services and funding in states where they are legally permissible. In a society with fewer organizations capable of mediating social conflicts, more focus will turn to the private sector to provide social benefits that courts or state legislatures have ruled impermissible at the national or individual state levels.
  5. The Securities and Exchange Commission’s regulation for publicly traded companies to report their climate-related risks represents a necessary function of government and will install a needed floor for expanded climate transparency. If upheld by judicial review, it will serve as an important baseline for standardizing future transparency requirements for publicly traded companies across the entire economy. The SEC should commit to updating its regulation every five years. A final SEC regulation will not meet all stakeholder expectations for climate reporting, but it will provide academics, activists, corporations and government agencies a significant publicly available database through which to analyze reporting trends and plan additional transparency commitments.

    More focus will turn to the private sector to provide social benefits that courts or state legislatures have ruled impermissible at the national or individual state levels.

  6. As ESG issues continue to expand, corporations will need to establish a formal process for deciding which topics to address. It is simply not possible, nor desirable, for publicly traded or privately held companies to speak out on all the issues on the public’s agenda. They have to choose by: developing criteria for evaluating the importance of a variety of social issues and deciding whether to engage; assessing how the interests of their shareholders align with those of stakeholders; and defining how their core company values enable them to navigate the thicket of controversial topics and develop specific positions and messages. 
  7. Most CEOs are not committed to expanded climate or broader ESG reporting. Instead, they prefer the corporate doublespeak of highlighting their own company’s sustainability leadership while using their trade associations to eviscerate sensible regulatory proposals. On June 17, for example, The Business Roundtable, which rhetorically embraced “stakeholder capitalism” in 2019 (with no substantive follow-up), girded itself for battle and forecast the end of civilization if the SEC climate rule was not revised and reproposed. In the roundtable’s highly distraught language, it asserted the proposed rule was “unworkable,” involved “a high degree of uncertainty,” presented “increased liability risk,” was “overly burdensome” and “could result in disclosure of sensitive information.” Overall, a familiar melody from a well-known songbook.
  8. The euphoria over ESG investing during the past several years should make us all more cautious in trusting organizations across the political spectrum that are advancing an agenda different from the one they espouse. When Larry Fink of BlackRock was proselytizing his clients and exhorting CEOs to regard ESG as “investing in progress,” he was overselling his own, much narrower goal to monetize climate-related financial risks rather than saving the planet. When Ceres served as cheerleader-in-chief for the Climate Action 100+ coalition, one of its primary objectives was to negate ExxonMobil’s financial stability by melting its asset base. Now that Fink no longer deigns to be the “environmental police” — fossil fuel companies are making money again for his clients — his eye roams for other dancing partners.
  9. The cracks in the current activist-financial institution coalition are not the end of ESG’s forward momentum. The ESG agenda is simply too connected to core societal issues and political movements in the U.S. and the European Union for it to dissipate, much less disappear. In America, which has entered the 2022 political season with the beginning of the presidential race shortly to follow, the debate over ESG issues will intensify and become more contentious. ESG has entered the lexicon of hardcore conservative activists who see it as another “values” wedge issue to motivate their political base to vote for a Republican Congress. Fox News, the Wall Street Journal and other members of the conservative media have already started deploying their television hosts and columnists against the SEC’s climate reporting role and begun a broader fusillade against organizations perceived to be “woke.” More liberal ESG proponents are less skilled or successful in combating these types of campaigns.  
  10. The debate over the ESG agenda has become embedded in the contest to preserve democracy itself. Election outcomes, regulatory and economic policies, court decisions, public demands and social movements are likely to play a greater role in defining the scope of ESG priorities in the next several years rather than conversations among technical experts seeking greater alignment across existing reporting frameworks. The views of environmental and financial experts, while of continuing importance, must respond to the demands of civil society that is reexamining and repurposing its core values.

July 11, 2022 at 02:27PM

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