ESG: Dead or Alive? On Life Support? Or Essential for Survival?

I have been involved in many conversations, webinars, reports, evaluations, and assessments around ‘ESG’. I have watched the recent video clip by FT on ESG titled “Who Killed the ESG Party?”. This was an interesting commentary on ESG, with some painting it as an almost dead horse, whilst the recent post by @NawarAlsaadi, sharing Google Analytics tells a different story. In his post, ESG is a racehorse gaining momentum, chomping at the bit to be the next Secretariat. Others share his perspective. All of these posts bring me to the same conclusion.

Not everyone really understands ESG. Not everyone is on the same page. There are villains and angels. There will be winners and losers. In all elements context matters (the time, place and condition). I note that for some it’s not just E, S, and G, so what is ‘it’? (A discussion for another post.)

Call it what you will, you need to take the environment into account as a starting point, and understand that while there are risks, there are also incredible opportunities. The bottom line - there is no economy without the environment. If you don’t believe me, stop breathing, stop drinking water, and move to Mars. Oh, wait, Tesla does not have an extension cord that goes that far …

In the expression planet, people, profit, there is no win for the piggy in the middle, unless the planet is considered first. The truth is the planet will survive quite nicely without the pursuit of profit and without people. So, for people to survive, this means people have to change their behaviour, to align with the way the planet operates.

On our current pathway, as the environment becomes more unstable, with more frequent, violent shifts, with more ‘unnatural’ disasters, we will all experience more weird, wild weather. Perhaps we should all think about how to become ‘climate ready’. The three elements of ESG are interwoven, interdependent; meaning our environmental ecosystems, our social (and financial) systems, and our governance principles are interconnected through our decisions and our actions. Change one thing here and something (unexpected or unintended) happens over there.

Social systems are displaying more controversy, more conflicts, more chaos, more war. And this affects the financial system, which The Economist continues to comment on as being more volatile, with trust devolving. With or without an ESG perspective, the devolution of trust is very dangerous. Trust takes years to build but can be lost in a social media minute. ?

When making decisions about investing in ESG, the smart money will be on those projects, assets and activities, which are supported by a robust, credible, and reliable management systems approach (an EMS). This is evidence that an organization understands what it does that causes an environmental impact that is significant, upon which other elements can be factored in to understand the risk and the opportunity. A well-designed systems approach includes actions to be taken, which are periodically checked to make sure the system is delivering what is wanted and needed to do better.

It is important to also acknowledge that the decisions made concerning what is environmentally significant stem from a parallel thinking process for the determination of materiality. Materiality is a filter, which includes information essential for decision-making, which can be applied to identify issues that reflect an?organization’s environmental and social impacts, as well as information that supports?strategic decision-making (to invest or not to invest), and to avoid misstatements that could affect the intended user’s decision. While some graphics display ESG as on the same horizontal access, I disagree. E is the foundation upon which our social systems and financial system (which is a figment of our imagination) operate.

When an organization or a person misrepresents its position on its relationship to the environment, this is greenwashing. Greenwashing, whether intentional or inadvertent, is a must to avoid. It has potential consequences for materiality, with increasing fines when a company is singled out, and under scrutiny, charged with greenwashing, such as RBC in Canada. ?Companies have already been heavily fined on greenwashing charges. Desiree Fixler, called DWS Group out for what she saw as a deeply flawed ESG framework. However, should their deception be the reason for others to be FT’s ‘party poopers’?

Clearly, there is an interest from the financial community in more data. But more data is not always the best option, what you need is the right data, separating the idle chatter from what really matters. Preferably data is converted into information, reviewed by those who are subject matter literate to become knowledge and then applied with wisdom. When decisions on the stock market floor appear to be made by a hormonal teenager, it’s no wonder that some view ESG as being the proverbial baby that needs to go for a swim with the bath water.

Humans are biochemical creatures, and they emote their response in less than 90 seconds, and then seek confirmation from numbers. Numbers are used to confirm or justify their position, rightly or wrongly. With the recent introduction of AI, some may see AI as a way to accelerate or enhance data collection and analysis, but dependency on AI is it itself a risky pathway, an issue worthy of its own discussion. For now, keep in mind that AI is human centric (i.e., the data does not come from nature, it is gathered by people using code written by programmers who may or may not know how to spell ecology). AI has already proven to have significant risk given its insatiable appetite for energy and water, with unintended consequences. Google’s greenhouse gas emissions have ballooned, according to it’s latest environmental report.

While assessment for significance or materiality may use data, both are judgment calls. Judgments are affected by education, culture, belief, events, etc. While many still label E and S considerations as non-financial, the more astute investors and financial advisors see these as ‘extra-financial’.

ESG does require some deep thinking by those with money, and those investing on their behalf.

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