Reactionary Rhetoric: De-Politicising the Discourse Around ESG
Towards the end of 2022, governance and disclosure became a stick which both sides of the culture war brandished at one another. The term ESG has become politicised, and controversial. The sustainable investing debate is riddled with accusations of ideology outstripping impact. These accusations are not limited to either end of the political spectrum, but both sides of that debate are missing the point, this debate is about how we proceed with transparency under capitalism; a set of principles that guide responsible institutional investors in the era of climate change that ought to be purged of ideological contamination.
With the backlash against ESG in full swing, we wanted to examine whether it truly is a death knell for stakeholders considering ESG investment, or if it’s a passing reaction against a paradigm shift in how we approach capitalism.
Rhetoric into Reaction: ESG Factors
Criticisms of ESG investing run the gamut from calling it a harmful placebo to a challenge to democracy itself. Some of these criticisms are more helpful than others. The placebo argument acknowledges that ESG is here to stay and the distinction between ESG done right and done wrong is more valuable than ideological sabre rattling. On the other end of the scale, we have claims like, “ESG funds wield proxy power to advance a progressive agenda”, as if ESG was never anything but a weapon in a progressive war against democracy, rather than a barometer of climate and financial performance.
Claims that ESG criteria are a tool to foist ideology on investment decisions have been followed by attempts from United States legislators to limit ESG’s influence on investment. Many of ESG’s detractors represent the interests of constituents who would benefit from maintaining the status quo. Is it exclusively driven by ideology if they’re acting on behalf of those they represent politically? Are they acting out of a political opposition to “woke capitalism”, or the same model that’s always kept the wheels of profit-driven capitalism turning when it comes to making investment choices?
ESG is Material, not Ideological
A lot of anti-ESG rhetoric calls for regulators to strip non-financial and social responsibility ESG considerations from investment decisions, as if resilience and sustainability contaminate the fiduciary purity of investment portfolios. ESG’s proponents say that the era of fiduciary purity is over; that the capital-dominated, resilience and sustainability rejecting view of investment is, in fact, short sighted and anti-fiduciary. If the long term consequences of ignoring ESG will impact investors negatively, then ignoring the ESG issue is financially irresponsible and the solution lies not in ideology, but implementation.
Environmental, human rights and social concerns are innately political, so we can’t completely extricate ESG from ideology. What we can do is avoid using ESG as an ideological weapon, and focus on ESG data.
ESG Data: Overcoming Immeasurability
The immeasurability of a lot of ESG metrics makes it an easy target for critics who rely on traditional metrics to judge the success of responsible investing. For ESG’s supporters, overcoming immeasurability is essential to proving the value-relevance of funds, and justifying ESG's continued existence. It’s already difficult enough for companies to prove the positive climate-related or human rights effects of measures they’ve taken. Social impact is particularly difficult to nail down. Environmental metrics have been discredited by scandals about the true value of carbon offsets, falsified reductions in greenhouse gas emissions, and corporate greenwashing.
As long as a financial balance sheet is more immediately quantifiable than an analysis of ESG risks, the claim that “doing good” means “doing well” won’t mean a lot; ESG will remain an easy target for politico-cultural firebrands for whom the burden of proof isn’t much of a burden at all.
The Paradigm Shift: An Essential Change in Perspective
If the transition to an ESG strategy-driven world is inevitable, it’s worthwhile to look at it not as a passing fad, but as symptomatic of a paradigm shift in the way we approach corporate governance and capitalism. Gone are the days when the generation of capital was all a company or capital markets need concern themselves with over their decision-making. In these fraught geopolitical and environmental times, capital must share its precedence with other considerations, like the welfare of workers and local communities, or reducing greenhouse gas emissions.
Within ESG, the new paradigm is manifested literally in concepts like double materiality, where the value of an impact investment has as much to do with its impact on people, communities and the environment as it does with capital returns for the investor. ESG scores will form the basis of new best practices for all investments, not just impact investing.
ESG Governance is About More Than Business, It's about Survival
The conversation about ethical business, environmental stewardship, governance factors and responsibility to workers is a conversation about survival; it isn’t going to stop. That being the case, whether or not “woke capitalism” is a symptom of our time is irrelevant. What we’re really looking at, and what we really should be debating, is how to work with the paradigm shift towards responsible business, not against it.
Like it or not, ESG Investing is here to stay. But what does that mean for the future of global sustainable finance? Read on to find out.
The Positive Impact of ESG Investing on Supply Chain and Labor Standards
In addition to its focus on environmental issues, reducing carbon emissions, and improving corporate governance, ESG investing has a profound impact on the supply chain and labour standards of companies. By integrating social and ethical considerations into investment decisions, ESG investors incentivize corporations to adopt responsible practices that promote inclusivity, sustainability, and the fair treatment of workers.
ESG Disclosure, Transparency and Supply Chain Sustainability
ESG investing recognizes that a company's supply chain plays a crucial role in its overall sustainability performance. Issues such as deforestation, human rights abuses, and environmental degradation can be prevalent within supply chains, and investors aim to address these concerns. New regulations such as the EU's Deforestation Regulation and CS3D require companies to conduct due diligence to ensure that their supply chains are free from deforestation. This approach encourages companies to source materials responsibly, reducing their impact on forests and promoting sustainable land use practices.
By investing in companies that prioritise sustainable supply chain practices, investors contribute to the preservation of natural resources, protection of biodiversity, and the reduction of harmful environmental impacts. They also ensure that their portfolio of investments remains compliant with the incoming avalanche of global sustainability regulations, whether they be from the EU or the United States.
Can Improving Labour Standards and Social Inclusion Attract Investment?
ESG investing also focuses on promoting fair labour standards and social inclusion within companies, in factories, farms, and affected communities. By considering labour practices and diversity metrics, investors encourage corporations to prioritise employee well-being, health, and safety.
Companies that value inclusivity and provide equal opportunities for all employees tend to attract investors seeking to support responsible business practices.
What Does ESG Mean in Business?
The United Nations and various international organisations have been instrumental in promoting labour rights and inclusivity through ESG frameworks. The United Nations Guiding Principles on Business and Human Rights provide guidelines for businesses to respect human rights throughout their operations, including their supply chains.
Investors often consider companies' adherence to these principles when making investment decisions.
The Role of Investing in Improving Social Inclusion and Labor Rights
ESG investing prioritises social inclusion and labour rights within companies, alongside environmental considerations. These investors encourage corporations to prioritise employee well-being, health, and safety by considering labour practices and diversity metrics. Companies that value inclusivity and provide equal opportunities tend to attract investors who support responsible business practices. International organisations like the United Nations provide guidelines, such as the Guiding Principles on Business and Human Rights, that promote labour rights and inclusivity. Adhering to these principles helps companies align with ESGcriteria and attract investment. Furthermore, calls to link ESG factors with executive pay are on the rise.
Implementing Good ESG Practices Will Attract the Right Kind of Investment
Implementing robust ESG practices will attract investment from ESG-focused investors. If things continue on the current trend, all investors will be, to some extent, ESG investors. Companies that prioritise ESG factors gain access to capital from investment funds and institutional investors that have sustainability strings attached. By actively managing their environmental impact, promoting social responsibility, and maintaining strong governance structures in line with regulations, companies become more appealing by demonstrating that they've got their ESG ducks in a row.
Companies with strong ESG initiatives gain a competitive advantage and enhanced reputation. Consumers and stakeholders increasingly value sustainability, ethical practices, and social responsibility. By implementing and communicating strong initiatives, companies differentiate themselves from competitors and build brand value. This, in turn, fosters customer loyalty and strengthens relationships with stakeholders. Additionally, companies with good practices demonstrate better risk management, which can lead to lower borrowing costs and increased investor confidence.
Analytics and the Future of Investing:
Analytics play a vital role in enhancing impact investing over time. As data collection and analysis become more advanced, investors gain better insights into companies' performance in environmental, social, and governance areas. This information enables investors to make more informed decisions and allocate capital to companies that align with their sustainability goals.
Organisations like the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), provide standards and frameworks for companies to report their performance. These reporting standards facilitate the collection of consistent and comparable data, allowing investors to evaluate companies' progress and track their impact over time.
Moreover, advancements in analytics enable investors to conduct more comprehensive audits of companies' ESG practices. By leveraging big data, artificial intelligence, and machine learning, investors can analyse vast amounts of information, including company disclosures, industry trends, safety standards, and third-party assessments, and use that information to bolster the detail in the ESG chapter of their annual report. These analytical tools help investors identify risks and opportunities, assess the effectiveness of a company's internal controls, and ultimately drive improvements in performance.
ESG is Going Nowhere
ESG investing has a positive impact on supply chain sustainability, labour standards, and social inclusion. By considering these factors, investors incentivise companies to adopt responsible practices and prioritise the well-being of workers, communities, and the environment. The integration of analytics in investing further enhances its impact, allowing for better data-driven decision-making and continuous improvement in companies' performance.
As the global focus on ESG continues to grow, it is expected that the positive impact on supply chains and labour standards will expand. Through responsible investment practices and ongoing advancements in analytics, investors contribute to a more sustainable and inclusive future, where companies strive to meet the highest standards of corporate social responsibility (CSR).