Is ESG the Remedy to Climate Change?

A week doesn’t go by where I don’t hear about different interpretations of ESG, ESG products and services, ESG integrated solutions, ESG alignment or the latest ESG standards – the list goes on. There’s no doubt ESG is growing in popularity as investments in ESG strategies grew 42% from 2018 to 2020, and 2021 was a record-breaking year for ESG funds, attracting nearly $70 billion in net flows. But what I don’t hear often is whether ESG is a harmful distraction to businesses who could make real impact. Recently I attended the NY Times Climate Forward Conference in London, and one of the sessions provoked an exciting debate of whether ESG could be considered a distraction to climate action? And although I have heard many grumblings about how ESG is just a box-ticking exercise, I hadn’t heard the arguments put forward by the naysayers, those who think it distracts from the very issues it’s trying to solve. 

ESG is a Distraction

The audience were asked beforehand where we stood on the matter. The room seemed quite divided, but to my surprise there were plenty of people who agreed that ESG was a distraction. The speakers for the motion highlighted how the lack of clear rules and regulations in ESG makes it a free for all because companies set their own boundaries and choose the ‘how’ and ‘who’ they compare against. They used sport analogies and argued that companies are both the players and the referees which in turn means there is no real accountability. Some might say that with more data, sportsmanship will occur naturally, and that the free market will correct itself and do the right thing but without regulation setting the boundaries, a voluntary approach will only take you so far. They argued that ESG is being gamified by financial markets with skewed scores and ratings that amalgamate incorrect data. Elon Musk complaining about Tesla being excluded from ESG Indexed ratings due to its poor governance was cited as an example of poor ESG outcomes. They concluded with their final argument that ESG felt more like a heist than a credible solution.  

ESG is an Added Value

The speakers who were against the motion and supportive of ESG focused their efforts on one point, to prove how ESG had been additive. That, even in the absence of regulation and ESG being voluntary the benefits to climate change are hard to refute. With over 2,000 companies who have set climate targets with the SBTI since 2015 resulting in an emissions reduction of 29% compared with an increase of 3.4% in global emissions from energy and industrial processes over the same period, it’s difficult to not see its value. To further emphasise ESG’s positive impact, it was highlighted how businesses who are doing ESG in vain are being caught out for greenwashing. Only recently were Deutsche Bank raided for misleading statements in their 2020 report over claims of billions of investments being classed as ESG integrated. This is not something that would have existed without independent regulators and markets demanding accountability.  

Who Won?

From both sides of the panel, you could see the importance that ESG plays. Even in facilitating this debate it shows how ESG is not going away, and how we need to demand more from companies to demonstrate greater transparency, ambitious targets, reporting and verification. When the audience were asked how they felt after the debate, it marginally went the way of the ESG supporters. But the important take away was that if ESG were to continue to empower change, it must be real and credible. Good ESG strategies require fundamental shifts in company operations so that ESG assessments and measurements are incorporated into the fibers of the business just as they are with financial performance. However, it is clear that not all companies are steering themselves in the right direction, so I have outlined a few fundamentals to help build a good ESG pathway:  

  • ESG Strategy Assessment – Make sure the purpose is simple and convincing 
  • ESG Standards – Clarify that the board owns the company’s purpose 
  • ESG Reporting – Incentivise and track purposeful behaviour  
  • Assurance – Get the purposeful behaviour verified 
  • Annual Review – Tell your story with impact reports and strong communication 

Here at Eight Versa, we believe that a well-structured ESG framework that incorporates real purpose is backed by the board, incentivises, and tracks purposeful behaviour as well as achieves third-party verification so that it is more than just a tick box exercise and helps truly drive the Net Zero transition.  

If you would like to discuss further, feel free to get in touch with one of our ESG experts 

Nuno Brito e Cunha, Head of ESG and Sustainable Finance at Eight Versa

Nuno specialises in advising companies to identify, outline and implement sustainability strategies across their organisation, bridging the gap between financial reporting and environmental responsibility. He has experience in Sustainable Finance Disclosure frameworks and EU Taxonomy alignment, Investment portfolio management and analysis, PCAF Accounting, GHG Protocol standards, B-Corp Certification, TCFD Reporting, UN SDGs Framework application, Product Life Cycle Assessments (LCA), and Science Based Targets (SBTi) reporting.
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