(Credit: Katusa Research)
In the past six to twelve months hundreds of articles have surfaced raising concerns about ESG (Environment, Social, Governance), a term often used in financial circles to refer to non-financial issues for responsible investing. For instance, O’Leary and Valdmanis writing in their HBR article entitled An ESG Reckoning Is Coming, point out, “The push in recent years for companies to commit to ESG efforts is commendable. But so far, those efforts have yielded scarce results.” And many, including Thomas O’Neill who writes for Responsible Investor, have noted that ESG ratings are wildly inconsistent.
In addition, some of the early adopters of ESG investing are now raising doubts about its long-term efficacy, according to Bloomberg, For instance, Japan’s Government Pension Investment Fund, the world’s largest at $1.6 trillion, initially put billions of dollars into ESG indices over the last few years but recently top officials at the Fund have begun questioning performance and fiduciary duty.
Meanwhile, efforts from regulators globally, including the U.S. SEC Climate and ESG Task Force, have continued to grow, seeking to address lack of data quality, consistency and comparability, and a better definition for non-financial materiality, among other things. Most recently, Germany has pushed for mandatory reporting and has indicated it will develop its own system if an EU-wide system is not developed. In Dubai, a directive from Dubai’s Department of Tourism and Commerce Marketing (Dubai Tourism) mandates that all hotels comply with the sustainability requirements for hotel establishments by July 1, 2021.
At the same time, a slate of new sustainability management frameworks and tools are rapidly coming to market. For instance, as I discussed last week, The Future Fit Benchmark is a strategic management tool grounded in science-based targets and aligned with the UN Sustainable Development Goals (SDGs). Becoming a Certified B Corporation explicitly requires companies to balance profits with purpose. The Shared Value Initiative, with its Purpose Playbook, aims to help companies better understand what it means to have a purpose-led organization that is focused on shared value across a wide spectrum of stakeholders. The Value Balancing Alliance is an alliance of multinational companies collaborating to create a measurement approach that translates environmental and social impacts into comparable financial data. BASF, a founding member of the Alliance, is among the early testers of the product. Finally, Impak, a Canadian and French start-up, has built impak IS², an impact assessment and scoring solution that addresses both negative and positive societal impacts and is aligned with the Impact Management Project and the SDGs.
Whether ESG stands the test of time remains to be seen. One thing seems clear: current approaches to ESG will need to transform in order to avoid the common pitfalls of ESG management.