ESG: The big picture - triple risks
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.
Here, we explore why popularity, imperfect measurement and quintessential implementation challenges could create the perfect storm for ESG, and increase the risk of greenwashing.
What goes up...
It’s hard to miss the ESG revolution currently underway. It is rumoured that ESG assets under management “may hit $53 trillion by 2025”,¹ representing a third of global assets under management. The response of governments and business leaders to the COVID-19 pandemic has fuelled the already popular trend, with stakeholders of all types championing a green recovery. Business leaders have called on the government to “use the recovery to accelerate the transition to net zero”.² Senior ESG investing experts believe we are now ‘over’ the debate about whether the ESG issues are relevant.
Governments and other institutional stakeholders are reciprocating this enthusiasm. Christine Largarde, President of the European Central Bank (ECB), “wants to explore every avenue available in order to combat climate change”³ and committed some of the €2.8trn asset purchase scheme to support green objectives. National governments have established both fiscal and monetary policies that promote ESG.
Popularity, at a cost
Despite this enthusiasm, or perhaps because of it, concerns are mounting about whether this momentum is leading to activities that truly deliver sustainable outcomes, or whether the political expediency of sustainability rhetoric is masking limited and immaterial activities. In a crushing exposé for ESG champions, the former BlackRock Chief Sustainability Officer made headlines claiming that “Wall Street [i.e. mainstream international banking infrastructure] is duping the public with flawed financial products dressed up in ‘PR spin’ which claim to have a positive impact on the climate emergency but are little more than a “deadly distraction” to real, systemic change”⁴. In a similar vein, the inventor of the Triple Bottom Line, a model for sustainability says he is “volunteering to carry out a management concept recall….of the “triple bottom line,” a term I coined in 1994, [proposing] a strategic recall to do some fine tuning”⁵. Cries are rife of greenwashing.
Fundamentally, the risk is that ESG and sustainability activities are not delivering the outcomes that they report, typically because those outcomes are not being measured accurately, transparently and consistently. The high media exposure combined with consumers who have been led to hold unreasonably high expectations about ESG and sustainability products means that businesses and investors are under significant pressure to deliver results, despite these imperfect measurement tools, and can’t sufficiently surface failures for fear of consequences. Therefore these failures may be buried. This misses an opportunity for that company and also the sector overall to learn from the mistake, identifying the causes, faulty assumptions and opportunities to course correct the sector overall.
And now, the hard part
As everyone engaged in delivering projects involving multiple stakeholders with competing priorities knows (so, everyone), accurately assessing what we should do is just the beginning. Even if we can course correct our strategies and mechanisms within our ecosystem, implementation challenges, inconsistencies with coordination and resource constraints will remain.
The lack of standardised measurement is a key challenge. A senior expert at a leading ESG fund, explained to us that this absence of standard impact measurement has led them to develop their own methodology and approach. While this enables them to deliver for their clients, it adds to the proliferation of standards for the sector overall, exacerbating the original challenge.
Another implementation challenge is to identify who is best to lead the charge. Most large organisations now have an ESG professional who is responsible for leading their ESG efforts, and some organisations are wholly specialized in ESG. There is much discussion about ESG mainstreaming, whereby ESG would become the responsibility of a wider pool of employees. There are, of course, benefits to widening the pool of ESG advocates within an entity who are incentivised through KPIs and performance reviews to deliver results. But we should be careful about not mainstreaming too early to the avoid the risk of too many cooks and not enough expertise.
These three factors - popularity, imperfect measurement and implementation challenges - combined lead to a risk of greenwashing. Greenwashing can create a reputational risk for ESG and sustainability, at a crucial time when meeting consumers expectations is critical to the sustained success of the sector. However, as we’ll explore in the third article in this series, there are several remedies to these risks.
FOOTNOTES & LINKS
1 Bloomberg, Feb 2021 ESG assets may hit $53 trillion by 2025, a third of global AUM https://www.bloomberg.com/professional/blog/esg-assets-may-hit-53-trillion-by-2025-a-third-of-global-aum/
2 Financial Times, UK business leaders call for green coronavirus recovery plan https://www.ft.com/content/49cac3b5-6463-4a21-9452-643b750431d9
3 Financial Times, Lagarde puts green policy top of agenda in ECB bond buying https://www.ft.com/content/f776ea60-2b84-4b72-9765-2c084bff6e32
4 The Independent, It’s moving deckchairs on the Titanic’: Former BlackRock sustainability executive says Wall Street’s green investing is ‘PR spin https://www.independent.co.uk/climate-change/wall-street-finance-blackrock-oil-greenwashing-b1819272.html
5 Elkington, J. (2018) 25 Years Ago I Coined the Phrase “Triple Bottom Line.” Here’s Why It’s Time to Rethink It. Harvard Business Review, Digital edition June 25, 2018 https://hbr.org/2018/06/25-years-ago-i-coined-the-phrase-triple-bottom-line-heres-why-im-giving-up-on-it