ESG a corporate disciple or another fad?

ESG a corporate disciple or just another fad?

Introduction

ESG an abbreviation of Environmental, Social and Governance principles that were first conceptually brought up by Adolf Berle, a young professor at Columbia University. The term ‘ESG’ was introduced in a whitepaper published by the UN “Who cares Wins.” Initiated by the UN secretary general and UN global compact in collaboration with the Swiss government. 

With the first publication surrounding the idea that companies and investors integrating ESG factors into their decision-making processes are better equipped to manage risks and seize investment opportunities in a world where the investment landscape is changing rapidly primarily pointing towards stakeholder interests. 

Since the publication, the assets managed by professional fund managers using ESG focused metrics have risen to $46 trillion globally in 2021 citing a report from the Deloitte Centre for financial services. By 2024, this figure is expected to rise to a value of $80 trillion in all professionally managed assets.

•  Environmental: Environmental factors are related with the functioning and preservation of the natural resources available.

•  Social: Social factors pertain to the problems that influence society on a frequent basis.

•  Governance: Governance factors relate to an internal organization’s controls and the ability to adhere to industry and government  regulations.

Positives

ESG has a lot of proclaimed benefits, these include: -

• ·Enhanced reputation and market value: Brands that are focused in creating value for its shareholders using ESG are likely to benefit from added PR and marketing benefits. Bath and Body Works Inc. had seen a massive rise in its share price from $7.9 per share in Nov 2020 to its peak of $76.41 per share just a year later. This happened due to the company’s sustainable practices and its initiative to reduce carbon footprint which was thereby supported by stakeholders alike.

•  Lower long-term cost:  Despite the short-term costs of instilling sustainable practices, firms operating on a long-term horizon are likely to benefit from higher corporate profits provided that these activities are done with the right intention in mind. Instances such as installing solar panels in a manufacturing plant may halt current production but reflect in the lower use of fossil fuels in the near future. 

• Greater governmental support: Up to date ESG practices can reduce regulatory and legal risks. Alongside this governments would be influenced to help such firms using the provision of lower taxes and subsidies.

• Easier in attracting talent: Due to the growing popularity in ESG amongst younger crowds, the workforce would be more attracted towards firms that are transparent, faithful, and impactful with their decisions.

•  Improved access to private & public funding sources: With the popularization of Socially responsible investing (SRI), institutional investors prefer to screen stocks that have ESG elements in it as an attempt to promote sustainable growth and benefit from higher future profits.

 Alphabet Inc. (parent company of google) is known for its ESG practices. In 2022, it issued $5.75 billion worth of sustainability bonds of which all the net proceeds have been allocated toward its CSR policies. It has also replaced 66% of electricity in its data centres with renewable solutions that are “carbon-free”.

Trend in ESG

Following the trend from the white paper published in 2004, a group of 70 investment and environmental officials associated with the UN in 2006 published 6 principles for responsible investment, a document that states the key considerations investors should have at times of investing in ESG focused companies. 

In 2011, Jean Rogers launched the sustainability accounting standards board (SASB) that cover the performance of 77 industries (spread across 11 sectors), ensuring and establishing uniformity in reporting sustainability goals. Sustainable development goals also known as SDGS are metrics that have been popularized over recent years. Established in 2015, these 17 goals comprise of 169 specific targets and 232 unique indicators of progress. The goals focus on a variety of issues such as food scarcity, infrastructure development and climate change.

Negatives

Greenwashing is a term that involves firms using marketing antics to show their sustainable and ethical practices where in reality its just a stunt to increase shareholder value. According to the Economist in 2021, 20 of the world’s largest ESG funds had stakes in industries such as oil, coal mining, alcohol, and tobacco.  

Another similar feud occurred with McDonald’s in 2019 introducing paper straws replacing its existing plastic ones. The controversy behind such a decision was that even though less plastic is being used in production, the paper straws were not recyclable putting the conglomerate in massive negative limelight.

The lack of uniformity in the ESG reporting process has made it difficult to enable like-to-like comparisons for investments/businesses within the same industry. As many different ESG frameworks are available, it is hard to accurately determine the true impact of implementing such practices to the performance of the company. One such ESG framework is SASB which is previously mentioned in the article. Unless regulatory boards pass a mandate to follow a specific framework, it is difficult to determine the tangible effects of these events.

Impact of stakeholder activism on ESG related practices

Stakeholder activism has gone a long way in promoting ESG related practices as not fulfilling these claims can have an adverse impact on profits, company value and reputation. According to data from Fact Set, the number of shareholders sponsored proxy proposals have increased alongside the number of shareholders that have voted in favour of these proposals during 2009-2018. The average support is at its highest in 2018 at 26% indicating an upward trend in these practices.

Companies have also made changes to their corporate policy as there has been increasing employee activism where employees have been more vocal in expressing issues to the management. These can arise due to situations such as investments in non-renewable technologies, unfair pay, and an autocratic leadership style. 

In 2018, 100 of Microsoft’s employees protested its work with the U.S Immigrations and Customs enforcement (ICE). Microsoft had been involved in providing AI and data processing capabilities to impose cruel and stringent immigration policies. Consumer activism led to strict action being taken against fashion brands such as H&M and Nike that exploited workers in regions such as Myanmar where underage workers were paid less than minimum wage to work in dissatisfactory conditions.

Recommended steps

• Have an ESG focused team: - A lot of large corporations have set up ESG departments so that these objectives align with company vision. Vehicle Manufacturer Ford has a Sustainability, Environment and Safety engineering team in place to meet these initiatives. ESG analysts are also employed by firms to ensure an internal viewpoint of its practices and performance

• Apply an ESG framework that best fits global standards: - The global reporting initiative framework (GRI) is used by 82% of the world’s largest corporations. Many CSR policies of firms revolve around this framework. 

• Maximize stakeholder engagement: Press meetings, AGMS, Board of Director (BOD) meets, are some ways in which firms can listen to its stakeholders and be updated with opinions on its corporate policies.

• Ensure ESG reports are published regularly: - A transparent process should be established in which reports are prepared based on future goals, progress, and a suitable action plan. Most ESG reports are released annually alongside its financial statements (for public listed companies).

Related conferences & conventions

The following conferences can allow individuals to gain a greater understanding of ESG related events, prompting action and suggestions of further alternatives.

1. G20 Summit: The G20 summit consists of members and invited nations. The member includes countries, AU (African Union) and EU(European Union) representing the 20 official parties of the summit where countries such as Spain are permanent invited guests. Under the theme “One Earth, One Family, One future”, involved the discussion of issues comprising of food security, climate change, health, and development. One of the prominent discussions involved changing measures to keeping global average temperature increase to “well below 2°C above preindustrial levels” regarding the previous claims made in the Paris agreement

2. COP 28: The 28th Conference of the Parties on Climate Change (COP 28) will take place in the Expo City, Dubai between Nov 30- Dec 23. The conference will bring forward the signatory countries of the United Nations Framework Convention and alongside climate actors to achieve tangible climate change effects.

3. Economist Impact 9th Annual Sustainability week:  The sustainability impact week organized by the well-known publisher, The     Economist brings company executives from “blue-chip” companies to derive practical solutions on environmental and sustainability concerns. The 9th edition is expected to happen in the Business design centre, London, UK during March 4-6, 2024.

4. EarthX 2023: The event happened during April 21-23 at Fair Park, Dallas, Texas. EarthX is a not-for-profit organization that seeks to educate and inspire people worldwide to take more sustainable and environmentally friendly decisions. The next event would happen in 2025 and not 2024 due to renovation at the Fair Park.

Ending statements

In summary, ESG has been a revelation when it comes to shaping industries and taking actions that lead to a progressive future. ESG on its own carries forward a legitimate cause that is only shaped by our actions. In its true essence, ESG is only fulfilled when economic agents do not have other self-fulfilling actions in place. Though ESG practices have evolved over the years, practices such as greenwashing still exist and are only present to obtain greater marketing benefits without a tangible purpose in mind. Empowerment towards ESG goals lie at the hands of stakeholder activism without which these goals would just be put in a negative limelight.

The true verdict of this response relies on state actors to make climate change decisions, taking a neutral stance when commencing with its global frameworks and practices. The results of which would be seen in a decade or so. Recent conventions can be a great indicator of the path the state actors would carry out in the near future.

 By: Udaykumar Priyani | Linkedin