The media verdict has come in for ESG investments – but far from looking in the winner’s enclosure, you’re more likely to find that your bet hasn’t even made it to the starting gate.
‘Break up the ESG investing giants’, thunders a recent Wall Street Journal op-ed (paywall). Jeff Prestridge, writing for the Mail on Sunday even more recently, calls the sector a ‘mess, awash with funds that are simply not fit for purpose.’
Stuart Kirk, in the Financial Times (paywall) earlier this month, says the ESG industry must be split in two. Kirk is pro-ESG but notes the industry has an existential flaw: the difference between the perception of taking ESG issues into account when assessing the potential risk-adjusted returns of an asset, and genuinely green and ethical investments. The latter would see plenty of assets rubbed out which currently make the cut. Regulators, says Kirk, have ‘never bothered disentangling them.’
Sustainable Future News has previously explored this sticking point. One source said ESG was a ‘great marketing hub to grab a whole load of dollars by sticking a label on it.’ But for companies looking beyond the investment side and how they can best act – what can be done? Who is to blame? Has the term become too toxic?
A City AM article from July may provide an answer. ESG, writes Charlie Conchie, faces a time of reckoning after being ‘hijacked’ by marketeers, backed up by an EY report which suggests the industry faced a ‘make or break’ moment, with standardisation and regulation issues key to solve.
“To be honest, I would fundamentally disagree with that point of view,” Andrew Wilson, head of responsible business at strategic consultancy Lexington, tells Sustainable Future News. An economist by training with three decades in sustainability – Lexington looks at helping businesses provide positive change – Wilson’s outlook covers both sides of the equation.
“I would say a concept like purpose has been hijacked by marketeers,” Wilson adds. “I accept that’s got to be a starting point; your singular organisational goal has to be your starting point. But if we only talk about a purpose – and that can be hijacked by marketeers – it becomes ephemeral and meaningless almost.
“[With] the ESG framework, by saying ‘okay, what are you going to do in environmental impacts, social impacts, and how are you going to govern the business to deliver those impacts?’, [it] actually provides a very strong framework for holding companies to account and measuring their impact.”
The easiest way to find purpose, Wilson notes, is to ask what the world would miss if your organisation was not there; something that goes beyond products, services, and the creation of jobs. But as far as ESG is concerned, the framework works, and it goes beyond purpose. Wilson authored a Lexington blog post in July which argued The Economist, in a leading article, was ‘offering very weak gruel’ in its assertion that only the ‘E’ in ESG mattered.
“The framework gives no place to hide,” says Wilson. “You can define your purpose, you can create a good narrative about what you’re going to do in those three areas, but unless you report against hard data, and opening that up for verification, then you will leave yourself open to criticism, and double standards, and greenwashing.”
This is a view backed up by Jamie Hyman, a managing director and co-founder of fellow strategic consultancy Snow Hill. Hyman specialises in ESG and helping technology companies firm up their sustainable communications. “It’s inevitable,” she tells Sustainable Future News. “It’s all related. It’s not enough to just do environmental good if you don’t consider the social impacts of that as well.”
Hyman gives a hypothetical example of a company who has found a way to more easily recycle waste; yet a subsequent community impact study found an increase in traffic as a result, meaning a social negative for residents. “These are all small parts of the same large puzzle that companies need to be thinking about,” says Hyman.
Wilson warns of being a ‘sustainable business in an unsustainable world’ and notes a lot of his work is to help companies see the wider context. Is regeneration, rather than sustainability, part of the answer?
“If we focus too narrowly on ESG, you can produce a good report that has good metrics, shows you’re managing your environmental impact, you’re doing all the things, employee engagement, social things, you’ve got a good governance structure in place,” adds Wilson. “But if you’re not fundamentally addressing your wider impacts, you’re doing all of that in an unsustainable world. So you have to move beyond your own narrow impact.
“It’s only when you do that, that you begin to move from a narrow definition of sustainability into something that’s more about regeneration, and recognising [that] fundamentally, whether we like it or not, business is a key player in addressing the climate crisis.”
Hyman goes further when addressing this longer-term, wider-ranging approach. “I think the really forward-thinking companies are thinking about this on a systemic level,” she says. “It’s not just about businesses thinking about ESG in terms of their own operations.
“To make a real positive change, they need to think about it systemically, and that can mean anything from proactively participating in circular economies, to investing in initiatives that support ongoing diverse talent development,” Hyman adds. “Really, the forward-looking companies are considering the big picture.”
The good news is that the consultants can help break this large task down piece-by-piece. Wilson advises companies firstly set context: look at their competitors and ask what they are doing; look at their stakeholder groups and understand where they might be in five years’ time. This is followed by a materiality assessment, before the key question: what is business-critical in achieving your long-term business objectives?
From there, an ESG framework can be forged. “It’s as simple as that,” adds Wilson. “Understanding the context and materiality is really important, and then developing a framework format, where you’re changing people’s thinking about the issues, because of the data and the different voices you brought into the conversation.”
“It’s not just enough to look inward at your own corporate ESG activities,” explains Hyman. “You need to think about the communities you operate in, the society you operate in.
“Depending on how large your company is, understand how your interactions impact the communities, whether it’s positively or negatively, and really seriously account for and take into consideration,” Hyman adds. “What your initiatives are, how they’ll affect those communities, and how you can plan your initiatives to more positively affect your surrounding communities.”
Advocates therefore find the framework is solid, but does the term ESG have too much baggage attached to it? Is it a problem? “We don’t want to throw the baby out with the bathwater,” says Wilson. “There are many people arguing against ESG. I think if we retain the core of the concept about defining the issues, focusing on action, measuring and being transparent about the results, then it’s a very valuable framework to serve us well.”
“I don’t think it’s so much a problem – it’s just another item to take into consideration when we’re advising companies on ESG,” says Hyman. “The mere fact that greenwashing is almost always a word used in these initial conversations… there’s very much an awareness that it’s not just about how truly positively impactful your ESG initiatives are, but it’s that you need to communicate about them in a way that very clearly and very accountably demonstrates that impact.”
“I wouldn’t advocate moving away from it,” adds Wilson. “I would just say we need a greater degree of discussion about clarity on definition to challenge those sceptical views.”
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