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ESG – culture shift or passing fad?

Diane Nowell
Mar 05, 2020
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ESG issues have become increasingly prominent as businesses chart a route towards so-called responsible capitalism. Is this an authentic attempt to pivot away from purely profit-driven motives or is it all an elaborate display of lip service to the latest corporate fad?

Environmental, Social, and Governance (ESG) concerns have been gathering momentum gradually as public disquiet grows over topical concerns like the failure to tackle climate change, and the yawning income gap between workers and their bosses.

Last summer – perhaps fearing the effects of inaction – the influential US business group, The Business Roundtable (BRT), urged leaders to consider the broader social and environmental impact of their companies and to invest in the radical reforms necessary to promote a more responsible ethos.

The theme was echoed in recent World Economic Forum (WEF) talks at Davos which explored the potential for business to serve multiple stakeholders – including workers, customers and communities – rather than slavishly following the ‘shareholder primacy’ doctrine that’s been the touchstone of corporate policy for years. Some leaders signalled their commitment to more sustainable business accountability by signing up to a new framework that will enable greater ongoing scrutiny of ESG.

A fresh approach to investment

Naturally, most businesses already know what ‘doing the right thing’ looks like: paying fair wages, promoting equality, protecting the environment, and investing in communities. The rationale for swerving corporate responsibilities has hitherto been justified by the need to optimise shareholders’ interests over those of other stakeholders. However, where strategies are focused on purely short-term wins – paying less tax, for instance – they often come at the expense of long-term sustainable growth.

Many organisations may have no choice but to change tack, as investment firms step up their response to public scrutiny by setting their sights on sustainable opportunities. Most of the world’s leading central banks, excepting the US Federal Reserve, are already resourcing green finance, and asset managers are ditching controversial investments in favour of packing their portfolios with juicy sustainable prospects.

The world’s largest fund manager, BlackRock, recently announced its intention to double its sustainably focused ETFs, at the same time promising to excise companies that rely heavily on revenues from fossil fuels, as part of an ambitious, decade-long growth plan. BlackRock’s Chief Executive, Larry Fink, stood four-square behind the fund’s strategy, warning that with climate change continuing to present one of the most significant challenges of our times, companies, investors and governments should ‘prepare for a significant reallocation of capital’.

Establishing a new set of rules

BlackRock’s volte face could be regarded as a success for climate activists who have pressured the company to align its actions with the environmentally friendly rhetoric that has been a feature of its annual statements.

It’s a shift in tempo that’s rippling through other investor funds, as evidence mounts that putting ESG front and centre may spark stronger returns than relegating it to a wishful-thinking paragraph in a shareholder newsletter. If fund managers push companies to disclose ESG initiatives with the same rigour they apply to analysing credit risk, change could be rapid.

That said, ethical investment relies on clear data and accurate measurement. Yet, allegations of ‘greenwashing’ abound in the fast-growing ($30tn) responsible investment sector, perhaps unsurprisingly as opinions vary about what qualifies as green. Creating a consensus on how to reliably assess the impact companies have on society and the environment is an urgent requirement, as is the need to establish structural and regulatory solutions that release companies from being hogtied to short-term earnings goals.

As priorities are realigned, many believe that a corresponding shift the corporate model is inevitable. The elevation of share price over all other concerns – including paying fair taxes – jeopardises sustained growth and is beginning to look like an outmoded metric of success, ignoring, as it must, the wider wellbeing of our society. If companies exist only to reward shareholders – even if that comes at the expense of short-changing the communities on which they rely – it could be argued that they risk undermining the very foundations of their future prosperity.

Putting theory into practice

At a recent Headspring event, we asked a panel of financial experts whether they believed that the shift towards prioritising ESG considerations was the result of a genuine desire to promote sustainable business accountability or if it represented a publicity-driven response designed to placate the increasingly vocal green lobby.

Most agreed that the topography of the new ESG landscape was more sharply drawn than previous flirtations with social and governance issues, and that sector shifts presaged by ESG concerns – whatever the origins – were likely to have far-reaching effects on major energy, industry and transport markets. Importantly, our experts felt that the actual risk to the global financial system presented by climate change was impossible to ignore – even if the jury was still out regarding the best way of tackling it.

Regulatory requirements aside, the companies likely to enjoy the greatest benefits from committing to ESG reform are those who embed sustainability into business practice. Moreover, our panel agreed that as organisations compete for the best talent, those companies with well-considered ESG strategies would be best placed to attract young professionals who are seeking growth and opportunity within an ethical environment.

While adhering to bare-minimum industry standards may set the bar for compliance, the most ambitious companies will be looking to adopt a broader view of responsible investment.

Aligning corporate responsibility with global demands

As businesses juggle the – often conflicting – demands of multiple stakeholders, a flexible approach is essential. Trade-offs are inevitable in the drive to balance sustainable evolution with short-term business needs.

A key factor in any successful transition will be businesses’ willingness to take a long-sighted view of how ESG could underpin future growth and development, rather than viewing it as an inconvenient hurdle in the path to profitability. Once leadership teams fully understand what ESG means for them in the context of their own business, as well as against the global backdrop, the ability to embed and effectively communicate this movement will be crucial.

With climate talks reconvening this November at the Glasgow COP26, the spotlight will shine once again on progress against the Paris 2015 targets. Given the parlous state of international cooperation, activists will be hoping that investors’ championing of sustainable assets is the key to swerving political gridlock. If – thanks to increased levels of green financing – renewables succeed in marginalising polluting energy sources due to market pressures, the decarbonisation of industry and transport could gain traction.

More than a passing fad

Cynics say that the ESG trend is all theatre, possibly designed to dissuade governments from enacting regulatory reform. Nevertheless, these movements are being driven from the grassroots up and businesses need to have strategies in place to face them. If enlightened self-interest is needed to persuade companies – and their shareholders – to improve employee packages, contribute to happy, healthful communities and pay their taxes, then, advocates argue, it may be no bad thing.

The suspicion that some companies are paying lip service to environmentally friendly policies, while continuing to follow short-term, profit-led policies – so-called ‘purpose-washing’ – may take time to dispel. But, as ESG issues continue to exert pressure, organisations will find it hard to avoid making an authentic commitment to sustainable principles. The good news is that ESG isn’t just positive PR, it also makes a compelling business case for those who are prepared to go all in.

Regardless of motivation, the growing influence of ESG on business practices is here to stay and the challenges facing business are only going to become more complex. Forward-thinking companies preparing to plot a new course will need strategic partners to help them successfully navigate previously unchartered waters.