Takeaways from the 6 October webinar
On 6 October 2022, we hosted ESG in the new world order, an online panel discussion. The panel speakers were Paul Wenman, Owner, InvestAssure; Tina Mavraki CFA, Managing Director, Ingenios Limited; and Marta Caballero, Head of Investment Partnerships, Cultivo. Moderated by Geilan Malet-Bates, Green FinTech Forum Chair & Sustainable Finance Lead, P27. People from around the world attended the event. Here are some of the takeaways.
Environmental, social and governance
Environmental, social and governance (ESG) factors are a serious attempt to bring order and accountability to corporate sustainability. It is so successful that we are seeing ESG become almost a core element of a company’s licence to operate.
But there is a common misconception that ESG is equivalent to sustainability. ESG is different in various ways. For example, unlike sustainability, ESG has no economic element. But ESG also has a challenge in remaining relevant to society’s changing values.
Communities do not see ‘ESG’. They see only issues. Public opinion and values diverge around the world, something which sustainable development should take into account, for example:
- whereas about 65% of the public in Spain believe climate change is caused mostly by humans
- in Canada, Australia and Germany it is about 50%
- in Malaysia and the Philippines it is only about 35%
- and in Indonesia, in the top 10 emitters, it is about 15%
Geopolitical and other headwinds
The world is upside down in many ways which are affecting people’s lives. Energy supply, food supply, security and cost of living – some of the core building bricks of society are now all in doubt. Values are in flux as a result.
These are the realities that ESG in the new world order needs to accommodate if it is to be a driver of sustainable development. So we should not see ESG as THE vehicle for delivering sustainable development. But it is certainly now part of our sustainability toolkit.
The challenge is to use it appropriately and responsibly.
Businesses need to generate long-term value for investors (rather than short-term profits). Some businesses understand that this means taking E and S actions. But unfortunately, most of them are still happy to just rely on society to pay the bills for pollution.
Governments must play a role in reconciling profit maximisation and ESG actions through a) a higher global carbon price and b) forcing companies to internalise the cost of their dirty activities. It has to fundamentally impact the bottom line.
However, ESG is becoming politicised. In the US, for example, states led by Republicans are planning to ban pension funds from dealing with ESG-backing firms such as BlackRock. In New York, Democrats are complaining that BlackRock is not green enough.
A great leveller?
ESG is not a great leveller. It is the other way around. Sustainability is being shaped by the changes we are seeing in energy, food, security and costs of living. People’s values are being driven by these changes and this will affect how sustainability topics are prioritised by communities around the world.
The challenge for ESG is to stay tuned, listen in and adjust.
The role of finance and technology
Capital markets should penalise firms ignoring the environmental and social costs. But these are uncertain, inconsistently measured and in the future – they are not easy to value. Here is where environmental accounting, data and technology can help.
Nature-based solutions (NbS) should also be part of the response. For example, afforestation and sustainable agriculture. Well-designed voluntary carbon markets are the most straightforward way to finance NbS projects.
ESG frameworks and rating systems will have to be flexible and somehow adjust to these new realities if they are to mature from a business concept to a real driver of corporate sustainability and international sustainable development. Stakeholder engagement and corporate responsiveness to their concerns will be important to ensure that ESG programmes stay in touch with society’s priorities. ESG frameworks will need to be tailored and more attuned to sector-wide and regional issues.
Businesses should internalise the ESG asks and determine how a diagnostic exercise can sanitise and strengthen their strategy, systems and operations. They should bring accountability to the centre, be it the board, the executive team, or the three lines of defence (management, risk management and compliance, and internal audit).
Great financial innovation is happening, but financial markets alone cannot bring the change needed. Governments must incentivise businesses to internalise the externalities, i.e. take ESG seriously.
For more on NbS, please visit Cultivo.
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