Grasping the nettle to fix ESG’s lacklustre sustainability track record

Solid dashboarding principles can help companies provide clear and comparable data points to investors

Late last year Netflix riveted audiences with a climate change allegory, Don’t Look Up, in which an elite conspiracy risks global annihilation, motivated by greed. A pact emerges between a Trumpesque president and a tech tycoon to withhold atomic defences against a fast-approaching, Earthdestroying comet, in the hope of accessing its rare earth elements. While they succeed in hoodwinking an ignorant populace, their dubious fracturing plan goes awry, resulting in calamity.

Could environmental, social & governance (ESG) considerations — the now universally recognised catch-all for business sustainability disclosure frameworks — constitute such an elite cover-up, or does it present options for corporates to help achieve a more sustainable world?

The trail of poor corporate follow-through on it is as long as the history of ESG, and it is enabled by capital markets for profit. The 1960s crusade against DDT insecticide is an early example. The chemical was banned and raised expectations of corporate environmental accountability.

But chemical firms subsequently leant into regulation to secure exemptions from pre-market testing and information-sharing on thousands of harmful chemicals, on which they still defend lawsuits to this day. The perpetrators are judged

“medium” ESG risks, and nine chemical companies made it onto the influential Investor’s Business Daily top 100 ESG performers for 2022.

US trade unions ushered in ESG investing in the 1950s, ploughing blue-collar pensions into social housing and health, but asset managers only saw the potential far later. However, within four years of the 1990 launch of the first ESG index (now called the MSCI KLD 400 social index) it had racked up $2bn in assets across 26 funds. It persists with a capitalisation-weighted rather than performance-orientated approach. If this smells of a public relations stunt, it is not the first capital markets ESG initiative to do so. That honour belongs to the Coalition of Environmentally Responsible Economies (Ceres), which set out to change oil and gas environmental practices in 1989. By the mid-2000s, industry insiders acknowledged it was “more about managing perceptions ” than real environmental successes.

Ceres ’ founding was triggered particularly by the Exxon Valdez oil spill in Alaska. The perpetrator, ExxonMobil, still courts controversy on its environmental record to this day. When it was recently retained on the S&P 500 ESG index, Elon Musk, whose Tesla was also dropped from that listing, called ESG ratings “a scam”.

The profit motive is clear. On the one hand there is volume: Bloomberg Intelligence predicted that by 2025, ESG investments will globally make up more than a third of total assets under management, coming to a cool $53-trillion. On the other hand, there is margin: some of the more substantial criticisms of the Biden administration’s push to mandate government pension fiduciaries to consider ESG factors were that such funds charge higher fees.

Critics remain pessimistic about ESG’s efficacy on sustainability for two broad reasons. First, that ESG is too vague, trying to be everything to everyone. Consider high emitters, which often justify their existence against the job losses their demise would incur. The tensions generate real inertia among asset managers, consultants and lenders. ESG fund managers then often withhold information from investors under the pretence of commercial sensitivities. Financiers often appeal for debate and duck for cover.

This showed up in audit firm Mazars’ 2020 responsible banking practices survey, which found that none of the (mostly European) banks surveyed could be described as “outstanding ”, only 10% could be described as leaders in integrating ESG into their business decisions, and the majority (57%) were “laggards”.

In the US, one finance writer interprets the rule of thumb as: high-quality companies must also be high-quality ESG companies, and firms that are

“most attuned” to their investors and clients’ preferences must be tuned into ESG. This segues into the second criticism: firms are often not tuned in to ESG as there are no common definitions of materiality or thresholds — firms must devise their own sense or methods to do this.

Companies often default to benchmarking exercises that expose them to the questionable veracity of rating indices, given the lack of comparability of ESG data. They might take a risk management approach, isolating brand, operations, regulatory and finance risks that sound like ESG. In the reporting itself there is often a disconnect between the material issues identified in the front end and the line items of the report. And to disguise a dearth of specific information, often thrown into the mix is every obtainable visual, statistic and sustainabilityrelated accreditation.

ESG metrics often remain compliance hurdles rather than becoming truly embedded into every undertaking.

Business change expert Jennifer HowardGrenville identifies three ways in which this happens: When ESG metrics presume causality rather than impacts, such as when it may be presumed more women leaders mean more diverse perspectives, but it fails to deliver more social value. When ESG metrics struggle to account for systemic shifts, such as the cultural or product usages changes required to reduce waste; and when there is dependence only on measuring what is easily monetised, such as how carbon reduction emphasis is facilitated by carbon markets, while rollbacks in biodiversity destruction often escape consideration.

Nature must find greater prominence in materiality assessments, but it will not happen if they default to stakeholder views, as is de rigueur in the approaches of the big four corporate advisory firms. The business case perspective — materiality according only to financial impacts on the firm — almost always wins out, while the firm’s impacts on nature and society is ignored.

There are practical steps any corporate can take to better leverage reporting to achieve more sustainable value creation. Howard-Grenville forwards other recommendations: zooming in to develop insights on how the objectives contained in the UN sustainable development goals can best be supported by company processes, zooming out to understand the company’s impact and participation in the shared use of resource systems, and valuing curiosity and learning.

The best departure point is often the simplest but hardest-to-answer questions. What are the true sources of our company’s sustainability? How do we measure and report on how we grow them? Using solid dashboarding principles can go far in helping businesses provide clear, relevant and comparable data points to investors and other stakeholders. They should include suitable measures to track the past, show current conditions, and help predict the future in a way that can be traced back clearly to the company’s sustainability strategy. They would not just report carbon reductions without context, resource replenishment without defining what that means, or only data from inside the company.

They would outline a clear premise of sustainable value creation, convince they are the true sustainability performance criteria that top leadership of the company think about, and arm employees with a recallable range of targets to share in the ownership of the journey towards real sustainable outcomes.