Posted in GreenBiz
January 5, 2022

The year ahead in ESG: More scrutiny, better boards and the growth of greenwash

GreenBiz

Had enough of 2021 analyses? I’ll just offer a pithy take on the year scribbled on a sidewalk near my apartment in San Francisco: “2021 sux!” It sure did. But as GreenBiz Chairman Joel Makower noted in his annual year-end piece, it was reasonably kind to the world of sustainable business.

The world of ESG and sustainable finance saw some truly eye-popping numbers last year, e.g., $130 trillion via the Global Financial Alliance for Net Zero (GFANZ) committed to using science-based guidelines to achieve net-zero emissions by 2050, or the $35 trillion invested in some form of ESG strategy by mid year.

Big numbers should foster commensurately big changes, right? Well, the Mauna Loa observatory read 420 ppm of carbon dioxide in our atmosphere; the International Energy Agency (IEA), a group not historically known to align with activists, stated that coal development must cease quickly if we’re to meet the goal of net-zero emissions by midcentury. Meanwhile, the world’s largest asset manager continues to hold an exposure of around $1.2 billion in India’s largest coal firm.

As the highly contentious Carmichael mine gets its first shipment of coal ready for export, BlackRock has, as of this writing, not changed its position. This set-up encapsulates a theme I’ll be hyper-focused on in 2022: substantive actions from the ESG ecosystem of institutional investors, ratings agencies, corporate reporters and financial institutions that yield measurable progress in line with their lofty, and commendable, commitments.

I’m hopeful, even a little confident, that 2022 will see a clearer division between laggards and leaders than ever before.

Sustainable finance is one of the most quickly evolving fields within sustainable business today, and arguably the most impactful. A Code Red for humanity renders Band-Aid approaches to climate solutions useless. I’m hopeful, even a little confident, that 2022 will see a clearer division between laggards and leaders than ever before, with more serious penalties for the laggards and bigger rewards for the leaders.

Looking ahead, here are some themes and trends I plan to track closely in this second year of the decisive decade. Thoughts, questions, suggestions or tips? Please share them with me at [email protected]. I’d love to hear from you.

The growth of greenwash

No doubt you’ve heard the term, but it’s good to start with definitions. From my two preferred pedias: Wikipedia identifies greenwashing as “a form of marketing spin … deceptively used to persuade the public that an organization’s products, aims and policies are environmentally friendly.” Investopedia describes it as “the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound.” Do those resonate?

Accusations and the actual existence of greenwashing are hardly new. What is new is who is calling greenwash, and who is listening. Greenpeace calls greenwash, sure, and Kellogg’s makes cereal, no surprise in either case. But how about when Marvel — yes, the superhero comic book folks — calls greenwash on Vanguard, the world’s second-largest asset manager? It’s not just social media posturing: Marvel employees’ 401k accounts have been under Vanguard management, a relationship that apparently is ending.

The consequences of being, and being identified, as a greenwasher could start to hit companies’ bottom lines and business continuity in a way it hasn’t before.

Consider this: Intangible assets (including intellectual property rights associated with inventions and brands, customer data and software) for firms listed on the S&P 500 now command 85 to 90 percent of the index’s total value. Organizations’ goodwill and brand reputation are other key components. They also play a hugely important role in talent acquisition and retention, and it’s no mystery that the next generation of young professionals are vetting their prospective employers’ ESG credentials. And, they’re getting better at knowing what to look for.

As the ravages of extreme weather intensify in the global north, such as the floods, fires and freezes of 2021, the media has upped its game on covering the complex connections between climate change, enterprise, and social and economic phenomena. Thanks to collaborations like Covering Climate Now, coverage of climate change is being done with the rigor and credibility needed to capture this complexity: More facts and context, fewer polar bears floating on chunks of ice.

The well-informed and climate-concerned generation of young (and young-ish) professionals applying sharper greenwash scrutiny will become even more material for firms to manage. I’ll be keeping a close eye on how new greenwash filters –– such as this one that has developed software to identify corporate “blah, blah, blah” –– get refined and deployed in 2022.

The board is getting on board

While ESG issues are making their way to the top of agendas in corporate boardrooms across the world, ESG competence among board members is sorely lacking.

As the head of sustainability at a large U.S. bank told me last year, “My stuff went from being slotted into the last three minutes of the meeting to being agenda item No. 1. It wasn’t a gradual shift.” The GreenBiz team has heard myriad experiences like this from our community of sustainability leaders in large companies over the past year.

I’ll continue to track the growth of ESG leadership roles within finance, but 2022 may well be the year that corporate boards see the same fast-tracking of ESG-competent, or even ESG-excellent, members.

Diversity — in ecosystems, portfolios and organizations alike — engenders strength and resilience. By that measure, corporate boards in the U.S. are fragile and vulnerable. A small hedge fund made clear just how susceptible a sclerotic board can be, and I’ll be digging into similar wins in 2022.

Helle Bank Jorgensen, CEO of Competent Boards (and GreenBiz columnist), is optimistic for 2022. Why? Because not only are boards seeking formal training on ESG competence (which her organization offers), but asset managers and proxy advisors are starting to do the same. I share her optimism and, given some recent challenges, I’m especially curious to track how the major ratings and rankings firms develop similar competencies.

Heightened scrutiny of ESG funds

Even as the pandemic upended reality in day-to-day life and in financial markets, sustainable investing notched some really solid wins. The naysayers of ESG didn’t have much ground to stand on given sustainable investing’s alpha and the massive inflow of capital to ESG funds –– about one in three dollars managed globally was in some form of ESG strategy by the latter half of 2021.

But in the final week of 2021, a BlackRock ESG fund lost 91 percent of its investments, for reasons that aren’t being publicly disclosed, depleting its assets to a mere $69 million, down from $803 million just two days prior. And, to the detriment of dignified life on earth and the business case for sustainability, oil and gas shares overtook those of ESG darling companies. Exxon and Chevron, for example, added 48 and 40 percent to their share price, respectively, last year.

I sense these are speed bumps, not roadblocks, but they nonetheless present challenges to keeping the wheels on the ESG bandwagon.

I’m particularly excited to see new levels of scrutiny applied to ESG funds by regulators, NGOs, and customers –– both retail and institutional –– and how that fosters an effective and enduringly positive path for ESG products and strategies. Whether that scrutiny comes from InfluenceMap and its in-depth research on funds’ purported climate merits, novel applications for funds to assess their credibility as it pertains to long-term value or customers getting a clearer window into the funds in which they’re invested, you can expect more and deeper assessments of ESG investment vehicles.

Given forthcoming regulations for ESG investment products in the European and U.S. markets, I’m also curious to see how asset managers change their tune in presenting ESG strategies. As Glen Yelton, head of ESG client strategies for North America at Invesco, wrote for ESG Today, “[T]he more hyperbole we allow to accumulate around the impact of ESG, rather than leading honest and transparent discussions about what those labels actually represent, the less likely we are to achieve the outcomes today’s investors are so eager to support.”

The talent war wages on

Last year was, as Joel Makower wrote, “a good time to be an ESG professional. A very, very good time.” The very, very good times look like they’re going to keep on rolling in 2022.

ESG’s ascent in the world of business and finance was faster and steeper than the existing talent pool of trained ESG professionals could possibly fill. Many firms spent 2021 playing catch-up, which often started with hiring someone to “lead ESG.”

I had many conversations last year with new ESG leads across both financial institutions and corporate reporting companies. Some were veterans and leaders in the space –– e.g., Dave Stangis landing at Apollo or Jean Rogers at Blackstone –– but many others have their grad school graduation closer in their rearview mirror than even I do.

For the latter group, an oversimplified summary of responses to my query of “What do you do?” could be “Check back with me next year.” I’m really keen to learn more from these folks as they start to build new teams and competencies and get to work.

Something else I’ll be keeping my eye on in this vein is the professionalization of ESG, both through newly minted offerings in ESG education from organizations like CFA Institute and PRI as well as from within higher education. If 2021 was a major growth spurt for the ESG profession, I’ll be looking to see how the profession fills out a bit in 2022.

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