ESG: Keep it or Drop it?
We’re running out of time to solve the climate crisis. ESG could be a powerful tool to speed up climate action, but it has flaws and questions remain about whether we can afford it in these times of uncertainty.
“Still way off track”
The news that ancient superviruses might get released soon due to the rapid melting of Arctic glaciers sent shockwaves around the world this week as many countries have barely recovered from the COVID pandemic. But it could get much worse very soon.
The newest research published in the United in Science report confirms that we are nowhere near winning the battle against climate change, or as the UN Secretary-General Antonio Guterres puts it “[…] still way off track”.
Greenhouse gas emissions are now higher than pre-pandemic levels, and despite some progress in countries’ updated mitigation pledges for 2030, these must be at least 4 or 7 times more ambitious if we are to limit global warming to “well below 2°C and preferably 1.5°C” above pre-industrial levels respectively as set during the Paris agreement.
To make matters worse, we are already dangerously close to passing five tipping points beyond which there will be “irreversible changes to the climate system”, given the current global warming of 1.1C according to a recent Science study.
Key to powering up climate action
ESG could help us cope with the challenges ahead of us.
First introduced in tandem with the sustainability agenda under UN Secretary-General Kofi Annan in the report Who Cares Win, ESG refers to all non-financial elements that companies should take into consideration to get a holistic view of the risks and opportunities surrounding their businesses.
Produced by the private sector for the private sector, ESG found its true purpose when the UN launched the Principles for Responsible Investment (PRI) in 2006. This caused a big push towards ESG as investors accepted the idea that ESG companies are more profitable than companies that do not take into consideration non-financial measures in their business analyses.
As of 2020, 88% of publicly traded companies have ESG initiatives in place followed by 79% of venture and private equity-backed companies and 67% of privately-owned companies, according to respondents. Source
This move toward ESG is truly beneficial for the climate as it includes climate-related actions, such as reducing or offsetting carbon emissions, shifting to clean energy for production, and cutting down on polluting activities.
Clearly, powered by responsible investing ESG could be a powerful tool to boost climate action and achieve the climate goals.
A flawed concept?
But, despite the recent boom, ESG has been the subject of major debates not only about its effectiveness but also about whether or not it should be completely overhauled.
One major criticism is related to whether companies are truly committed to ESG or simply pretending to maintain their positive image. The former sustainable investor at Blackrock became a whistleblower last year when he revealed many companies conduct green initiatives to simply benefit from the financial advantages of ESG bonds while continuing to do business as usual.
Similarly, although not a new concept, headlines were made earlier this year when the police raided the offices of Deutsche Bank and its asset management unit DWS on allegations of greenwashing. Another shortcoming often raised concerns the unreliability of ESG data and ratings and the idea that ESG might just be a cover-up for underperforming companies.
More fundamentally, ESG’s relevance is now put into question as recent black swan events pushed sustainability concerns aside or against one another.
The COVID pandemic caused major setbacks to progress on the environmental front. Fear of mass infections led to a significant increase in the use of plastic and single-use items (even in countries that had promised to phase them out) from take-out and food delivery boxes to surgical masks and other personal protection equipment.
This year, the war in Ukraine triggered a serious energy crisis and now countries must go back to burning coal — a break of the agreement to ‘end the coal era’ made at COP26 just last November — to cope with skyrocketing fuel prices and ensure that normal citizens do not freeze to death in winter. Fueled partially by this energy crisis, high inflation in many countries causing purchasing power to diminish will likely impact sustainable practices overall.
As a result, some argue that we need an ESG 2.0, others talk about solely focusing on ‘E’ while forgetting about ‘S’ and ‘G’. But serious concerns about whether we can afford ESG at this point remain.
ESG: Keep it or drop it?
As demonstrated in Mark Lynas’ book Six Degrees and the video below, global warming of more than 2°C would have disastrous consequences.
Still, in light of recent events, it is becoming less clear whether we should resort to ESG to boost climate action, let alone whether we can afford it. Should we deprioritize or significantly reduce ESG’s scope and pay the high price come 2030? Or should we actively choose to walk the hard path now, keep ESG and still attempt to limit global warming as much as we can while we still can?
What are your thoughts on this? We would love to hear about them in the comments.
