Confusing. Frustrating. Unmanageable. These are some of the terms often used to describe the challenges of ESG. You can use whatever terms you want, but there is something undeniable: compliance with the ESG is already the new licence to operate.

Environmental, social and governance risk management (ESG) is a by-product of the ESG movement initiated by the financial community to assess potential investments in companies in a portfolio based on environmental, social and governance metrics. In recent years, there has been a huge change in the market prioritisation of ESG risks. Consumers, investors and businesses increasingly consider environmental and social criteria a key decision-making factor.

Clearly, the ESG theme is complex. And the communication of the various ESG standards that define and specify metric requirements should become even more complex as regulation is required that all these metrics and associated values be incorporated into a single report where financial vs. non-financial distinction tends to disappear.

Two facts this week contrast well the opposite sides of this path that the ESG have to pursue:

  • On the one hand, the publication of Honeywell's latest sustainable environmental index study confirms that, despite all current economic and geopolitical concerns, the vast majority of companies (85%) are maintaining plans to increase investments in environmental sustainability initiatives. As Darius Adamczyk, Chairman and CEO of Honeywell, summed up, "despite challenging macroeconomic conditions, organisations remain committed to the fight against climate change and its sustainability goals."
  • On the other hand, Attorneys General from 25 Republican-leaning U.S. states announced that they had launched a lawsuit against the Biden administration, aimed at stopping the implementation of a new law that would allow for the consideration of climate and ESG factors in private employer-sponsored retirement plans. In the lawsuit, the AGs contend that the rule "undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totalling $12 trillion in assets —in the name of promoting environmental, social, and governance ("ESG") factors in investing, including the Biden Administration's stated desire to address climate change.". In other words, investing in ESG could jeopardise the ability to pay pensions in the future…

In this context, we must focus on the truly relevant: understanding what is material for all stakeholders, and not just for shareholders, so that investors can invest with confidence, consumers can consume in the certainty that they are doing so with products and services of responsible companies, employees feel that they are in fact part of organisations that are,  each to its dimension, to help solve one or more challenges facing humanity today.

And it is also in this context of uncertainty and confusion that something must be made clear: the ESG continue to serve essentially the purpose for which they were created (to allow investors a better risk assessment of their investments), but that is not enough. Of course, this risk analysis is fundamental, but these metrics have to serve a much more noble and demanding purpose – it is "simply" about ensuring that we are moving forward in protecting the Planet and People. I do not always see this clearly mirrored in the various articles that are emerging on this matter.

Despite all the criticism that is emerging and which essentially focuses on:

• ESG are a mere distraction (Milton Friedman theory)

• Too difficult to manage, taking into account the conflicting interests between stakeholders

• Uncredible metrics. And even if they're credible, they don't prove better financial performance

The ESG is already undeniably the new licence to operate. The negative externalities they generate are unquestionable; there are already several examples of corporate success in adopting ESG practices, and the metrics evolve and bring transparency and credibility – all this, combined with the demanding regulation that is coming, will only reinforce this concept.

Have a great and impactful week!

Nuno Moreira da Cruz
Executive Director
Center for Responsible Business & Leadership

This article refers to edition #176 of the "Have a Great and Impactful Week" Newsletter and covers SDG 9, 12 and 16.
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