Where do ESG and sustainable finance go from here?

S&P Global Sustainable1 President Rich Mattison; GreenBiz co-founder Joel Makower; Allison Binns, Angelo Gordon head of ESG; and I took an hour-long stab at answering the headline question last week on a GreenBiz webcast. The answer, you may not be shocked to hear: Well, it depends.

As ESG products and services were snapped up en masse in financial markets last year, the space came under attack. That was a good thing. It’s still under attack, and that’s still a good thing. But the tone, texture and temper of the attacks has meaningfully shifted, and the factors upon which “it depends” are naturally shifting as a result.

I previously wrote that increased scrutiny was a sign of ESG’s significant impact, and that the pushback wasn’t necessarily a hindrance to meaningful progress. Rather, reasoned criticism could be a boon to the evolution of ESG in its ability to shift capital allocation toward positive environmental and social outcomes while maintaining competitive returns.

While I think that remains true, some notable and high profile attacks this year have chiseled more fundamentally into the ESG edifice, from the foundation to the top floors. Again, not a bad thing.

We can’t get there from here without knowing where we are. Like Mattison told the GreenBiz 22 audience back in February, “Let’s work together on making sure that net zero is a destination in the GPS and not an ambition.”

So, where is “here” right now in the ESG GPS, and what’s getting in the way of getting “there”?

ESG | eeh-ess-jee | (noun? verb?): TBD

Voltaire said, “If you wish to converse with me, define your terms.” It would be a tough conversation with ESG with a tough French philosopher for many reasons, but this adage rings true for a preponderance of ESG in 2022.

While some anti-ESG arguments are too far down an ideological spectrum to fruitfully dissect, many others have merit. Especially when it comes to misunderstandings stemming from wobbly definitions.

In just the past week, Tesla boss Elon Musk called ESG is a weaponized scam, while HSBC Asset Management’s (suspended) head of responsible investing, Stuart Kirk, characterized accounting for climate risks in the financial sector as being underpinned by “unsubstantiated, shrill, partisan, self-serving, apocalyptic warnings.”

A key definitional problem for ESG can be found in a Musk tweet responding to Tesla’s getting dropped from the S&P 500 ESG index even while ExxonMobil was added: “Despite Tesla doing more for the environment than any company ever!”

ExxonMobil is no leftist darling. But while the assessment of ESG performance and the subsequent distillation into an ESG rating certainly is not determining”[h]ow compliant your business is with the leftist agenda,” as Musk claims, it is true that the measurement and reporting of ESG performance doesn’t align well with how the ESG story has been communicated to investors.

Some context: Insights and advisory consultancy GlobeScan found that 51 percent of American retail investors say ESG has influenced their investments, and 82 percent of retail investors globally say they are interested in investing in companies that are socially and environmentally responsible. But, almost a third say they lack the information required to guide their investments toward socially and environmentally responsible companies.

But, to date, the promise and the power of ESG investing has been miscommunicated to the public as a way to vote with your dollars for the world one wishes to see realized, and less so for what it really is: a risk assessment accounting for climate impacts on a company’s ability to create sustained value.

ESG ≠ Sustainability

Although they thematically rhyme, impact, sustainability, corporate responsibility and ESG are not synonyms.

Ken Pucker, former Timberland COO and current Tufts lecturer, recently shared an excellent bit of clarification:

“ESG is primarily focused on assessing risks and opportunities to companies as a result of evolving social, environmental and governance factors. As practiced in the US … it is principally about the impact of the world on the company, not the impact of the company on the planet. Thus, it does not make sense to conflate ESG investment with planetary action / sustainability. They are very different things.”

But at the moment, BlackRock describes ESG investing as “Investing in progress”; Vanguard positions its ESG products as “funds that reflects what matters most to you”; and for State Street Global Advisors, it is about “building a sustainable future.”

Salesforce CEO Marc Benioff once said, “If someone asks me what cloud computing is, I try not to get bogged down with definitions. I tell them that, simply put, cloud computing is a better way to run your business.”

The ESG industry has taken a similar approach to educating investors, and they’ve gotten a poor education as a result.

As anyone working in climate knows, the science isn’t really the issue, it’s how it’s communicated. There will always be art to complement the science of ESG, but as it stands, the space needs more scientists, better communicators of that science and less room for artistic interpretations. Allowing hyperbole to inform investors about the impact or capabilities of ESG won’t serve the industry, people or the planet.

If we’re going to find the proper ESG GPS coordinates, the industry needs to ensure that those using the GPS know how the thing works.

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