In the nearly two decades since the term was first coined, ESG has become widely known as discussed—but also frustratingly vague. This vagueness has greatly hindered and inhibited its adoption and implementation.
As I have been consistently fascinated by ESG’s role in the business world, and was given the opportunity to speak at the Future Investment Initiative’s panel, “Beyond ESG.” There, I was joined by four other speakers who offered a range of expertise and experience on this issue, helping to unpack this complex issue to facilitate a lively and multi-faceted conversation. The panel included Eng. Khalid Abdullah Al-Hussan, CEO, Saudi Tadawul Group; Laura M. Cha, Chairman, Hong Kong Exchanges and Clearing; Lori Heinel, Executive Vice President & Global Chief Investment Officer, State Street Global Advisors; and Julia Hoggett, CEO, London Stock Exchange Group.
I opened the conversation by reiterating the assertion that ESG is too vague to be useful. What is the ‘S’? What is the concept of social justice? What is the ‘G’? It begs the question, is it too difficult to comprehend altogether? ESG—shorthand for Environmental, Social, and Governance—refers, at least in theory, to specific data meant to be used by investors to evaluate the material risk of a given organization, based on the externalities it is generating. On a deeper level, ESG attempts to characterize how to manage investment risks from the constant fluctuations of climate change and the world more generally. This information can be used both to assess risk and to assign ethics. In theory, it seems like a moral boon and an entryway to good stewardship of the planet and of society. In practice, it can lead to abuse and obfuscation in the form of greenwashing. Or, it can simply be meaningless. After all, who is assigning these values? Who is deciding what ought to carry weight and why? When some people talk about ESG, they’re referring to the risk of a company or portfolio. What risk do they face in the future because of the environment? What is the risk to the business? Others talk about ESG in terms of impact investing and wanting to do good—these are two entirely different concepts.
ESG is about how an organization understands the way in which societal issues will impact upon ability to deliver strategy, to create value for shareholders and stakeholders. While the world is rife with organizations that understand this, many simply see ESG as a set of boxes to tick. In reality, good ESG needs to be judged very much in a local context. There is no panacea. There is no list that applies everywhere for everyone. Who are the stakeholders you are serving? What markets are those stakeholders in? What products are you bringing to market? How are you going to be impacted by your operations?
Another pivotal part of the discussion surrounded the misleading use of ESG as a label. Corporations have come under increasing scrutiny concerning the “S.” Volatile and unpredictable markets have meant many investors are refocusing their attention away from this metric altogether. My fellow panelists noted that corporations need a very clear framework on how they report and what they report. We reached a broad agreement that there must be a clear separation between the “E,” “S,” and the “G.” Arranging ESG in a ladder format with the governance at the helm appears to offer the greatest clarity, mostly as it’s guided by regulations within capital markets, and by guidelines of practice.
Despite the challenges posed by the vagaries of ESG, I do believe in its aims, broadly. There are a lot of laudable things associated with the ESG movement. Who could quarrel with wanting to pursue social justice, or being concerned about the environment and wanting to invest in a way that promotes those goals? In order to bolster this movement going forward, it’s time to focus on trying to reach an agreement and transparency on what exactly ESG is trying to measure. Metrics ought to enlighten, not obscure.