The (not necessarily, but very possibly) ugly future of ESG

A recent article on the ESG Core website announces: Barely an infant, ESG is under attack. That can inspire unity, create fractions or end up a mirage.

Written by Attila Schillinger, it muses as follows:

  • Stakeholder capitalism really is a hybrid experiment. Can we keep capitalism with its growth and consumption paradigms going while serving the interests of various stakeholders and saving the planet from total destruction? Can capitalism operate sustainably? The framework ESG offers is a means to that end. Far from perfect, ESG provides a compass for organizations wanting to (a) identify and manage long term operational risks and opportunities and (b) improve their leadership and performance benefiting people and the environment. Because ESG performance can be measurable, it can be managed even if a universal set of standards is yet to emerge.  At the same time, the lack of such standards and regulations make it difficult to compare apples with apples and produces lots of bad apples greenwashed to look like ESG champions. That hurts the infant. Do the trillions of dollars going into ESG funds truly serve the global transition to sustainability? It will be hard to tell until we come up with universally accepted definitions, metrics and reporting obligations based on those measurements. Where can ESG go from here?

Schillinger sets out three possible futures – good, bad and ugly. In the “good” one, ESG reporting fairly rapidly becomes standardized, and its impact on investing grows quickly: “Through transforming the banking sector and investment funds, integrating ESG in investment processes, it is years rather than decades before financing for bad actors, ESG laggards and harmful business practices will dry up because of the risk to reputation, potential lawsuits and new regulatory requirements.” In the “bad” scenario, a fragmentation occurs: perhaps sustainability reporting moves ahead, but the other two elements of ESG fall back. In the “ugly” scenario, ESG as a whole never realizes its potential, remaining “biased towards financial materiality rather than considering the reduction of harmful impacts on society and the environment.” After all, as one source speculated, “capitalism always finds a way to repackage an idea into a product that benefits the system.”

A recent Globe and Mail article, written by Jeffrey Jones, laid out numerous pending developments in the area, including initiatives by major pension funds (one of which for example “has said it aims to sell the remainder of its oil-producing holdings by the end of 2022, and has set up a $10-billion transition fund to help companies such as cement producers and steel makers reduce their carbon intensity”), regulatory moves toward making corporate reporting on climate risks mandatory (“the Canadian Securities Administrators has said it wants companies to adopt the framework set by the international Task Force on Climate-Related Financial Disclosures, which is becoming the accepted standard for climate reporting”), and moves by the banks, which “will be busy in 2022 tallying their own scope 3, or financed, emissions as signatories to a global group called the Partnership for Carbon Accounting Financials,” and for whom obligations are expected to “expand materially” in coming years. All this might seem like a basis for mild optimism regarding the “good” scenario.

On the other hand, the article acknowledges widespread skepticism “that the ESG-related machinations of the business world could have real impact.” Indeed, it’s far from clear that the “business world” (even if it succeeds in substantially remaking itself) will be capable of moving the broader world. There’s every sign that the US is heading toward some form of autocracy, and if so an aggressively anti-science one, in which incendiary short term pandering and chaos-mongering will crush any notion of rationally engaging with the future (and that’s putting it mildly). Canadian pension funds can issue any statements they like, but if a hellish “strong man leader” prioritizes the political payoffs of cheap fuel over all else, then drilling and extraction (and their reckless subsidization) will continue, or intensify. And if that activity flies in the face of copious technical disclosure and global pressure urging otherwise, that probably only means it continues with even greater get-out-of-my-face, elite-countering, give-me-liberty-or-give-me-death relish.

I wouldn’t blame anyone who resists seeing the future so pessimistically. When the basic foundations of Western democracy (and market performance built upon them) have held relatively steady for generations, it’s no doubt natural to assume their basic continuation, albeit in challenged form. The current happening-in-plain-sight nature of the current threat only makes it easier to conclude that it can’t be that bad. Well, let’s hope for the best. In the meantime though, there might be a bleak futility in working for better ESG standards and disclosures by individual organizations when the world around them is gradually wrecking the prevailing notion of the G for governance, with dismal implications for the E and the S. An ugly vision indeed…

The opinions expressed are solely those of the author

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