Fad or business fundamental? Reframing the discussion on ESG
After years of increased focus on environmental, social and governance (ESG) issues in both investments and corporate initiatives, 2022 has brought various levels of backlash.
Florida Governor Ron DeSantis dissolved Disney’s self-governing status due to the company’s stand on LGBTQ+ legislation. States from Florida to West Virginia to Idaho acted to deter state and school pension funds from investing in ESG products or companies. The Texas state government even put 10 financial companies, including BlackRock, on an ESG investment blacklist.
Amid such activity, an age-old question has resurfaced yet again: Is ESG a fad, or the future?
It goes without saying that Diligent falls firmly in the “future” camp. Here’s why we believe ESG is here to stay — and why we believe it should be an important part of any company’s strategy moving forward.
ESG Connects to Real Bottom-Line Risks and Opportunities
A 2019 Harvard Business Review survey found that ESG issues were “almost universally top of mind” for the investment and asset management community. And things haven’t changed over the past three years — if anything, many investors have dug their heels into ESG even more.
In late August 2022, the Financial Times detailed wealth managers’ attitudes toward green investing. This included their bottom-line results. “You invested in growth in companies with minimal [carbon] footprints and you outperformed the market,” Jonathan Bell with Stanhope Capital declared.
“Recent events in Ukraine have laid bare the risks of relying on fossil-fuel supplies,” AJ Singh with Brown Shipley said. “Moving to local renewable energy and adopting other clean technologies is becoming paramount.”
Among 27 wealth managers polled after the Ukraine invasion, 80 percent said they expected interest in ESG among their clients to increase in the year ahead.
Capital sources of all types are watching ESG, and it’s not just a company’s carbon footprint they’re looking at — it’s the workforce as well. The business world increasingly recognizes that more diverse thinking generates better decisions, both in leadership and throughout the organization. Talent attraction and retention is easier if you’re an organization with a strong ESG track record. Meanwhile, amid the Great Resignation (which is still a reality for many businesses and industries), companies with poor ESG performance may find themselves blacklisted.
We’ve also detailed how good ESG performance makes borrowing easier and cheaper. Many investors and buyers rely on ESG scores and ratings to signpost wise choices. Fall short on ESG policies and you’re signaling a risk of ESG incidents, reputational damage and low social trust diminishing your company’s value. In fact, a better ESG score can translate to about a 10 percent lower cost of capital. If you’re looking to raise a round of capital or go public, getting your governance in order is a prerequisite.
Activists and Regulators Are Still Paying Attention — and Taking Action
As state lawmakers waged a backlash against ESG in the United States, a tech billionaire was taking action of a different kind on the other side of the world. In Australia, Mike Cannon-Brookes launched a shareholder campaign that blocked AGL Energy from spinning off three coal-fired plants, which would’ve left them operational into the 2040s, instead of shutting down by the early 2030s.
“We embrace the opportunities of decarbonization with Aussie courage, tenacity and creativity,” Cannon-Brookes declared.
This is one of many recent forms of ESG activism. When Carl Icahn acquired shares of McDonald’s, he launched a campaign to push the fast-food giant’s management into improving conditions for the animals used in its products. Meanwhile, Sir Christopher Hohn of The Children’s Investment Fund is pushing the companies he invests in to be more transparent about emissions reduction efforts.
Hohn’s actions are part of a larger trend. Particularly in the EU and more liberal U.S. states like New York and California, investors are increasingly using information about carbon emissions, ESG ratings and more in their resource allocation decisions. Meanwhile, legal requirements around ESG disclosures are expanding. Annual EEO-1 reports in the US and Sustainable Finance Disclosure Regulations in the EU are swiftly being joined by new requirements like the SEC Climate Disclosure Act, the Corporate Sustainability Reporting Directive, and more.
ESG Is Here to Stay
If ESG has become a waning fad, these activists, investors and regulators certainly haven’t gotten the memo. To the contrary, they realize that environmental, social and governance issues matter — not just for the world but to the bottom line. And they’re staying the course on ESG, even as frameworks evolve and climate action and the geopolitical landscape remain complicated.
Companies would be wise to follow suit. There will always be contrarian views about ESG, particularly from those with vested interests in areas such as fossil fuels. There will always be room for discussion and improvement. Yet ESG as a business and board imperative is here to stay.
Ready to use modern governance technology to strengthen your ESG operations? Contact Diligent today for a demo.
