Environment, social (responsibility) and governance. It’s a strange brew, isn’t it? Three potentially very different broad themes amalgamated under one slightly ugly banner.
In communications terms, the ESG juggernaut has well and truly arrived having more or less safely kicked its predecessor – the annual Corporate Social Responsibility (CSR) report – into the long grass among the larger corporates and investors.
For anyone who’s been around the block in PR and corporate comms, trends in issues around corporate reporting change steadily over time, each having their day in the sun before being superseded by something new.
Before CSR became a ‘thing’ there were separate environmental impact reports until these passed out of fashion, or were incorporated into company annual reports, which became longer and broader as a consequence.
So, trends come and go, but it seems right now we are starting to hear the inevitable ESG backlash, which, let’s face it, was likely given the lumping together of topics based on a 2006 UN report and clearly including some inbuilt conflicts of purpose.
For example, how can publicly quoted petro-chemical companies suddenly appear to scrub up well in public image terms and start winning ESG awards simply by hiving off their more controversial, environmentally-damaging parts of their businesses to private owners?
These businesses will continue to operate in private hands, switching the transparency of public ownership and the associated scrutiny of ESG data for ruthlessly efficient management by private equity. In short, the sellers of the less sustainable assets win prizes and status while the public is left more in the dark about their continued operation, which makes it less likely that emissions will reduce. This may be a PR win, but is it an environmental one?
Similarly, how can the world’s largest electric vehicle producer miss out on an ESG index that includes Exxon? There are a lot of valid criticisms of Elon Musk, but Tesla has undeniably shifted hundreds of billions of dollars towards sustainable transport. Exxon may be the most sustainable oil and gas company, but they don’t give prizes for the healthiest cigarettes.
Of course, investment performance from fund managers is an entirely separate category. There’s not a huge amount of reliable evidence that proves ESG stocks are better bets than traditional stocks, especially when almost every corporate is claiming to be ESG compliant, or at least burnishing their best ESG credentials.
One of the problems is the incentives for performance in large organisations does not align with timelines for sustainable change.
Speaking to an audience of investment bankers and asset managers at the Climate Investment Summit, Jan Erik Saugestad, CEO of Storebrand Asset Management, spoke about the 2050 Net Zero targets. He said that one of the major problems with making them work is ensuring they are reflected in the governance structures, and according to the time horizons, by which directors are held accountable.
Many directors are making commitments on behalf of the people leading their companies in 25 years’ time, but those commitments need to have immediate consequences for the people in charge of the business now. The scale of change needed requires radical change and investment now, and incentives need to reflect this. We need to be realistic about how directors are paid for meeting ESG targets. While they might enjoy winning ESG awards as part of their company’s reputation and public image, we have to factor in the reality that directors of PLCs will be remunerated according to sales, profits and share price and little else.
Even if we can help firms to lower their carbon emissions right now, we will still have gradually increasing temperatures for the next 30 years. In the past climate change has led to war, famine and pandemics, and the sad truth is that this is likely to happen again.
Some in industry are aware of this challenge. Saugestad also noted that a cement producer was frustrated that European carbon tax was not extended further into the future because it removed their incentive to invest in long-term efforts to reduce carbon.
We also need to bear in mind that many of the environmental gains that are happening now are the result of policy measures taken years ago. Affordable hydrogen production is a great example. The fact it is becoming economically competitive and has the potential to make natural gas uncompetitive by 2030 results from policies implemented 20 years ago.
Let’s be honest, the growth of ESG did create an opportunity to add nuance to this discussion and create accountability mechanisms around environmental commitments, while rewarding companies that did good in addition to doing well. While consultants can be the most enthusiastic about ESG, and some would argue benefit the most, it has raised the issues that needed to be addressed and has directed corporate resources towards worthy causes.
But taking into account the issues discussed above over future timeframes, it’s fair to conclude that the short-term rush to gain good ESG ratings is not conducive to climate action, and companies that rush to brand themselves as green in return for a good ESG rating are actually muddying the waters rather than providing the greater clarity we need that accounts for the complexity in its fullest degree.
Until this happens, ESG reporting risks becoming another fad that will begin to give way to the next new trend.
By Ben Honan, Associate Director of Paternoster Communications