Is ESG Dead?

The Financial Times recently posed the question, "Who killed the ESG party?", featuring a series of interviews trying to understand why the topic plummeted so quickly from its peak on the financial market's agenda.

Not long ago, ESG became a buzzword in every market conversation - a magic wand that would align corporate profit with purpose. Investors, managers, and companies of all sizes embraced the cause, believing they were on the right path to saving the world while boosting their financials. It seemed to solve the age-old dilemma of "making money" versus "doing good" and offered a ripe opportunity for governments and politicians, representing an evolution of capitalism in its social role.

The stage was therefore settled for the excesses that followed. Specifically, regarding environmental issues and climate change, the world quickly committed to near-magical solutions, such as calling for the end of oil industry or electrifying the planet, simply disregarding implementation challenges and its consequences. Similarly, investors and banks swiftly became vocal advocates of the green agenda, without revising their capital allocation or credit risk assessment criteria accordingly.

Meanwhile, wealthy nations designed massive incentive programs, reinforcing their commitment to decarbonization while keeping an eye on local industrial development, or using it as an excuse to justify more protectionist policies. Poorer countries, however, continued struggling to secure funding for their initiatives.

A more cynical assessment? Humanity was confronted with an unprecedented pandemic, the perfect time to pay close attention to what science had to say and take climate change seriously. But we were also confined to our homes, unsure when the nightmare would end, leading to a steep drop in fuel and energy consumption, at least in industry and commerce, along with a boom in online sales, remote communication, and streaming consumption. Translating into investment opportunities: portfolios that were short on oil or energy and long on technology (therefore aligned with the low-carbon agenda) were poised to be the big winners—being ESG was easy!

Common sense argues that happiness equals expectations minus reality. Expectations were clearly exaggerated, but reality definitely outperformed in this case: demand rebounded faster than expected, fueling global inflation, technological challenges were underestimated, capital costs skyrocketed, the Ukraine war broke out, food competition arose, recession risks emerged, elections approached, and war in the Middle East ensued. The result? Happiness turned into depression. Worse yet, the market was caught off guard, perhaps trapped into a false sense of lightness of conscience or illuded that standardized certifications - more focused on reporting processes and transparency than on sustainable development plans - would be a guarantee of returns.

A little domestic example. In recent weeks, Brazilian companies that proudly wave the ESG flag, receiving high market ratings in this regard, took a questionable (to say the least) approach to Renovabio program, the globally recognized and functioning carbon market in Brazil. It's not the first time that CBio (program carbon credits) purchase targets imposed on fuel distributors have been questioned. But whereas the previous argument (mathematically flawed) was about a potentially significant price increase for the end consumer, the current thesis revolves around competitiveness loss due to delinquency in CBio retirements by certain participants, in fact old industry and government acquaintances notorious for such practices. CBio delinquency rates have reached an alarming 20% of the established target. Instead of pushing harder for oversight and punishment for delinquency or tax evasion - a chronic issue far beyond Renovabio in this industry - serious companies are filing injunctions to relax their own obligations, arguing loss of competitiveness and risking the integrity of a well-structured decarbonization program governed by transparent market rules.

I stand behind my strong belief that financial sustainability is an integral part of responsible management for any company, city, state, or country. Moreover, I do believe that correct economic incentives are the most efficient way to ensure economically viable and sustainable decisions are taken. That being said, changing mind or advocating on self-interest because a bet went wrong, finances tightened, or simply because the tide turned around is a completely different story. More so, call that ESG, good management, or commitment to sustainability makes it even worse.

After adjusting expectations, curbing exaggerations and excesses of any kind, we must return to the central and real issue behind this discussion: the visible escalation of climate change impacts, which are becoming more frequent and evident -droughts, floods, untimely cold and heat waves, fires, frosts, crop failures, consecutive years of record-high temperatures, statistically improbable climate sequences and massive losses of money and, most importantly, lives. The quality or transparency of reporting can never take precedence over concrete, real, and effective initiatives to create just and viable solutions for promoting global decarbonization.

The truth of the matter is: should the real world react with the same intensity and excesses as the financial market, we would all die of a heart attack, and climate change would no longer be an issue. Sustainability is a serious and urgent matter that requires commitment and is NOT going to die anytime soon.