These days everybody is talking about ESG. The movement is garnering greater attention as it spreads through more and more sectors and asset classes, particularly into the run-up to COP26 where climate finance is a central theme. We now find ourselves in the thick of a much-needed debate on the purpose and value of ESG as an industry.
On the one side are those who see ESG investing as a key weapon in our armoury in the battle against climate change, and a plank to building a fairer global economy that acts within environmental limits. On the other side, a backlash against its principles is being led by those who argue ESG is nothing but greenwash, with the likes of ex-BlackRock Tariq Fancy at the vanguard, with his Secret Diary of a ‘Sustainable Investor’ essays.
These issues have inspired much debate inside ESG Comms too, laying out the battle lines and looking at those nuances which are getting lost. Here’s a quick blog to capture some of that discussion.
A question of definition?
The first thing clear to us is that ESG has come to mean different things to different people.
At its core, ESG is about investors taking environmental, social and governance factors into consideration in their investment processes – from valuations to portfolio construction and engagement and voting. ESG investment doesn’t solely refer to a well-meaning group of progressives who only look to drive capital towards important, usually green, causes. It’s not impact investment. This suggests a binary, where there are good guys who invest in renewables for example, versus bad guys who won’t stop pumping capital into the likes of Shell, Exxon and the rest. This is false.
ESG should be defined as a commitment to factoring in ESG concerns into investment management strategies. It doesn’t always mean greenness is going to come through. Neither does it mean that all investments are immediately sustainable ones, even if their intentions are responsible and good.
Take Brunel Pension Partnership in the UK, for example. Quite rightly, it is viewed as one of the world’s leading lights in sustainable investing. Yet they regularly find themselves at the centre of a debate around whether it is best to divest from or engage with the fossil fuel companies they invest in (this debate is for another blog).
So a fundamental misunderstanding about what ESG actually is has played its part in the backlash.
‘Sexing up’ policies and processes
Another perception problem the ESG community has is an assumption that those in the ESG investment world must be doing explicit ‘good’ at all times.
The truth is: the outcome of responsible investment efforts are often new corporate policies, changed processes and better systems. That’s good for making markets fairer and greener over the long-term but rarely serves the needs of those wanting instant sustainability gratification, and by the way, it’s also not good enough when challenges such as climate change become urgent.
The inspiring work of the Investor Mining and Tailings Safety Initiative is a good example of this. In the wake of the Brumadinho tailing dam disaster in Brazil in 2019 which killed 270 people, over 100 investors came together to do something about the fact that there are hundreds of tailing dams around the world failing to be monitored and putting lives at risk. The initiative has created an independent Global Tailings Standard, created the first public global database of tailings dams, and seen hundreds of mining companies urgently review the stability and safety of their tailings at the behest of shareholders.
Standards and databases are not sexy, but they have saved lives.
Similarly, there is great merit in investing that does no harm while still delivering the stable financial returns required for pensions and savings – but we’re not sure that’s a message that many investors are putting front and centre of their brand identity.
Companies will always make decisions on what is best for the business. The rise in the (mis)understanding of ESG and this current debate seems to demand that all sustainable investment must never be anything less than perfect.
To emphasise, the reality is vastly more complex. For a food company with a long supply chain, for example, the challenges of addressing deforestation, food safety, nutrition and child labour issues (to name but a few) in their own operations and in their value chain is enormous, but if it cannot do so rigidly at this moment in time it does not make them a non-sustainable investment.
In short, the debate perhaps suggests that there are assumptions about what ESG investing is. And if the mainstream assumption has changed, does this mean that ‘ESG’ as a concept itself has also changed? Should we move first then?
We think that this debate is a very healthy process indeed, particularly when it comes to exposing the unhelpful and frankly dangerous amounts of greenwashing and questionable investing going on both in listed and private markets, which organisations like CDP are trying to address.
Here at ESG Communications, we know from our interactions with journalists and civil society that there is a much greater spotlight on cutting through the guff, fluff and jargon. The backlash is here. But we think: Let’s welcome the debate and the pressing need it brings for the ESG community to show the real-life impacts of the targets they set, processes they instigate and frameworks they develop. Let’s get everybody talking about them.