In this three part series, ESG: The big picture, we cover (i) how we got here, by exploring three defining turning points of ESG; (ii) where we are now, outlining the triple risks the ESG sector is facing; and (iii) where we are heading, mapping three ESG priorities coming soon to a zoom screen near you. We’ll use the Pace-Precision framework throughout this series to illustrate ESG’s development over time and trade-offs.
The goal for the ESG and sustainability sector is to deliver progress that is both rapid and precise, and over time could lead to a wholesale shift in the approach of businesses globally. Learning would be shared systematically, standardised frameworks would be internationally coordinated and there would be a transparent focus on materiality, combined with the energy and determination for rapid change. How do we get there?
Respect for expertise...
There are currently ESG and sustainability experts, and often teams, in the majority of the UK, the US and Europe’s major and medium sized companies. It is certainly true that the more ESG considerations are mainstreamed within a company, in particular but not exclusively at the management level, the greater the chances that the activities will be successfully delivered. In his response to the European Commission’s Sustainable Corporate Governance paper, Alex Edmans notes that “every director should be concerned with value; every director should be a Chief Value Officer”¹.
However, whilst this mainstreaming and ubiquitous support of ESG goals is certainly critical to the long-term delivery of ESG and sustainability outcomes, senior ESG experts are concerned that this trend could lead to mainstreaming of sustainability without necessarily having expertise. We should be careful not to overly simplify ESG and sustainability work such that we have strong buy-in but for imprecise and simplified activities. There is still an important role for ESG and sustainability experts to lead the discussion on the nuances, perverse incentives and traps of immateriality which need to be avoided.
Be real with consumers...
There is a disconnect between the enthusiasm of consumers to support ESG activities, and their level of knowledge about what doing so entails. Consumers, amplified by the media, are generating pressure on businesses to deliver ESG outcomes but at times without the patience and potential willingness to deprioritize financial returns.
Managing consumer expectations is extremely difficult to achieve, particularly in an era of fake news and media vacuums. There are some rays of hope. Increasingly, universities are offering sustainability programs which enhance the knowledge and familiarity of the complexities and nuances of ESG and sustainability, and Bill Gates used his prestige and profile to dispel the myth that divestment from oil and gas companies will deliver social impacts.² Ben Hubbard, Principal at energy investment boutique SICP, believes that keeping capital available to conventional energy companies is essential to driving transparency and increasing accountability across the sector.
Nonetheless, to really manage consumer expectations and increase the knowledge pool of the average consumers, the ESG and sustainability ecosystem will need to collaborate to ensure marketing and messaging is not reductive and that they train consumers to ask the right questions about how companies measure and track progress to ESG and sustainability outcomes.
Don't let the perfect be the enemy of the good
There are many excellent organisations already seeking to coordinate activities, set standards and create platforms to share best practice, SASB, PIR, MSCI and Sustainalytics to name just a few. These efforts are robust and increasingly well-known, and their work should be continued and promoted further.
Although difficult, where possible, these organisations could focus on the greater good of coordination at the expense of the success of individual entities, and should sign post peer services and standards where they are relevant as opposed to each seeking to create a full suite of standards and services.
If globally material activities are to be prioritised, full international coordination will be required. For example, China has recently launched its first carbon trading scheme, and ”it’s economy is being readied for a low-carbon world sooner than many expected”.³ Ensuring that China and other large economies such as Brazil, Russia and large African economies such as Nigeria and Kenya are leading collaborators and architects of international coordination will be critical to avoid a repetition of existing efforts, and to create some level of competition; a race to the top. Coordinated, thoughtful public policy will be critical to this, even if it wasn’t necessarily raised by the ESG experts as a critical tool.
FOOTNOTES & LINKS
1 Edmans, A. (2020) Response to the European Commission Study on Sustainable Corporate Governance https://alexedmans.com/wp-content/uploads/2020/10/European-Commission-Sustainable-Corporate-Governance.pdf
2 Gates, B. (2021) How to Avoid a Climate Disaster: The Solutions We Have and the Breakthroughs We Need. Alfred A. Knopf; New York.
3 The Economist, March 2021. China and America talk of co-operating on climate. It will be hard https://www.economist.com/china/2021/02/13/china-and-america-talk-of-co-operating-on-climate-it-will-be-hard