Elevate E from ESG
It was the 1970’s version of being woke: Earth Day April 22, 1970. It was a day when the world finally recognized the biggest victim of the unprecedented prosperity of the industrial revolution: our earth.
Almost 50 years later, the situation has gone from bad to worse as extreme climate wreaks havoc across the world. Even more surprising is that environmental concerns are now fighting for attention with a kaleidoscope of other social and governance initiatives ranging from board-of-director diversity to blood diamonds.
Yet, without prioritizing climate change above all other ESG concerns--Environmental, Social and Governance--these other worthy issues simply won’t matter.
It’s time to elevate and prioritize the E of ESG.
How the term ESG evolved depends on whom you talk with. MSCI, the leading indexer in the world, says the term came out of early efforts at socially responsible investing in the 1960s. Others point to an initiative by UN Secretary General Kofi Annan in 2004, who invited 50 chief executives to join the UN Global Compact, which eventually led to the Principles for Responsible Investing (PRI).
Today the PRI is followed by more than 1,600 companies while institutions, pension funds, sovereign wealth funds, and mutual funds have more than $68.4 trillion of capital committed to incorporating ESG factors in their investing and voting decisions.
And that is the problem. ESG can mean almost anything to anyone, making it extremely difficult to measure and even harder for investors to understand. Indexing giant MSCI, for example, rates more than 13,000 companies, and measures more than 65,000 securities and 8 million derivatives on ESG standards.
Worse, ESG allows greenwashing to proliferate. Under ESG’s lax standards, almost any company can comply depending on what weight it puts on particular environmental, social and governance practices.
In short, the catch-all of ESG makes it too broad to be an effective tool to combat climate change.
Efforts are being made to improve ESG standards. Last October, two law school professors—Cynthia Williams of York University and Jill Fisch of the University of Pennsylvania—together with numerous institutional investors that collectively manage more than $5 trillion in assets, submitted a petition for rulemaking to the SEC calling for the commission to develop a standardized comprehensive framework under which public companies would be required to disclose identified environmental, social, and governance (“ESG”) factors relating to their operations.
Mark Carney, Governor of the Bank of England recently said that “comparable, reliable, and clear disclosure,” for both “markets and governments” is needed to manage the transition to a low-carbon future.
Carbon disclosure is also a growing company best practice. Companies with more than $95 trillion of invested capital now support the Carbon Disclosure Project’s (“CDP”) annual survey of global companies regarding their greenhouse gas emissions and strategies for addressing climate change.
Under normal conditions, all of these earnest initiatives would be significant progress.
Yet even with all these efforts underway, extreme climate violence continues to rise.
More must be done. A first step is to recognize that climate change must be the number one priority for all companies and investors.
A small first step would be to get back to the original purpose of Earth Day and recognize that not all E, S, and G initiatives are equal and that the E must trump all.