The ESG Advocate 002 - To be, or ESG, what was the question?
It's only the second issue and we're getting into some deep philosophical questions, covering the existential crisis of ESG investing and the conflation with sustainability. Next, what if ESG and sustainability data isn't as bad as your think? SCOTUS' weighed in with another 🤦♂️, this time on climate. There were two interesting pieces related to research announced this week and a sustainability research finding in our Tweet of the Week.
Let's get to it!
Does ESG Investing Exist? 🧘♂️
ESG Investing, Just Stop It - by Cary S. Krosinsky
ESG refers to the risks and opportunities that exist for a company and the ecosystem in which it operates. If I were to define ESG Investing, it considers these factors alongside traditional financials as risks and opportunities to inform an investment decision.
There's even a problem with this thinking, which is that ESG is as fundamental to companies as everything else, so maybe ESG investing is just a more holistic picture.
As Krosinsky points out in his plea, ESG are issues that some stakeholder somewhere cares about. What firms refer to as 'ESG Investing' strategies are varied and nuanced and, in his article, can employ many different methodologies. So is it time to retire the catch-all 'ESG Investing?'
I'm going to struggle mightily with this, but agree that this is hard work, there is very little transparency on the actual investment strategies, and the meaning can range broadly. There are certainly investors and companies misusing 'ESG' right now. Even I do it a disservice by bifurcating it into two things: 'ESG Investing' and 'Sustainable Investing' (see below).
While this gets sorted, my recommendation is to ask how the person\company is defining it.
Regarding the confusion around ESG Investing (I used it already!), an author I very much enjoy following (go check out his Nexus trilogy) lamented the perception of ESG on Twitter in May.
Retail Investors and ESG: Assessing the Landscape | Betterment
Isn't there anyone out there who knows what ESG Investing is all about?
Well, Betterment surveyed 1,000 U.S. investors on their understanding and interest in environmental, social, and corporate governance (ESG) investments and saw a lot of confusion out there.
There's a lot of conflation throughout the report of what I would consider "ESG Investing" and "Sustainable Investing," the latter of which I consider to be in the Values-based investing section. Still, that section calls out a big dilemma well. Investors believe the environment is important, but still want returns. We looked at one solution from Rick Alexander in the first issue, just last week!
For the near term, we will continue to see more confusing products and promises from companies that promise the world, quite literally, without clarity about what they're doing.
ESG Data isn't as bad as you might think ✅
ESG Ratings – What they were meant to do, how they are misused - The Sustainability Story | Podcast on Spotify — open.spotify.com
Matt Moscardi, CEO of FreeFloat Media, joins this insightful episode into ESG ratings. Early on, he starts with two interesting statistics that point to the quality of data out there.
✔️10% of companies had to restate their financials in the past 2 years.
✔️13% of companies in the past 20 years had to restate their carbon commitments.
These two stats together show that maybe financial data, which many consider a rock of reporting, isn't as good as we think. Whether it is financial or sustainability data, it's open to interpretation, too.
It was fascinating to learn the evolution of MSCI's ESG ratings from the start, but what caught me the most was towards the end when he talks about driving outcomes. ESG is data and metrics, it doesn't drive outcomes. So, how are you using the data?
But Sustainability and ESG Data is hard 🛠️
The Higg Materials Sustainability Index has been used for sustainability item-level tracking by retailers. Unfortunately, it looks like it hasn't been doing enough.
I'm a big fan of consortiums of companies coming together to influence the reporting of ESG and sustainability data, but this issue points to just how difficult this is, even with the biggest brands in the world.
This story also ties in nicely with the podcast above. We need to agree on what these rankings and ratings are doing and how they are to be used. I don't think regulation is right, but more transparency is needed.
SCOTUS strikes climate 🌩️
Supreme Court Shackles EPA’s Authority To Regulate Greenhouse Gas Emissions From Power Plants — www.msn.com
Coming off of a string of horrific decisions, including the big one around women's rights, SCOTUS is at it again, this time neutering the EPA's potential ability to regulate GHG from power plants.
While the ruling is written to be limited to this case, it is likely to impact the government's ability to regulate in other areas.
Still, I think the markets will end up influencing this issue. In talking with companies, they are moving towards renewables as fast as clean energy is added to the grid. The SCOTUS ruling certainly slows down this effort and gives holdouts ammunition to postpone change, but it doesn't remove the need.
Since we need to move as fast as possible, there is no upside here.
Research drives action!🤝
Introducing the Microsoft Climate Research Initiative - Microsoft Research — www.microsoft.com
Working at Microsoft is super interesting because we're so big that it can be hard to stay on top of everything that's happening.
Case in point, we're launching a new Microsoft Climate Research Initiative (MCRI) in partnership with others to deal with some pressing issues:
📡 Realtime carbon monitoring with neural network
🪨 New carbon capture methods and technologies
🧱 Green cement materials
🍅 Food security and forecasting
I'm very curious to see what comes of this effort!
Incentives – Ethical Systems — www.ethicalsystems.org
Speaking of research, Ethical Systems has published a new research page on how to approach ethical incentives, compensation, and rewards.
Incentives drive behavior and when it comes to ethical behavior, the water gets muddy when money is involved. If you are covering the G and trying to incentivize the E, S, or the G, check this out before building your program!
🔥Tweet of the Week🔥
Dealing with uncertainty isn't for the faint of heart, but that's precisely what it means to look at sustainability data and apply its principles to management strategies.
It's a heavy read, but it can be hard to argue with their conclusions. For Sustainability Management to be successful, it needs to be studied for its focus on process orientation and outcomes, otherwise those "Grand Challenges" we see over and over, mean little.
🎙️Shameless Podcast Plug
ESG, Finance, and Technology with Matthew Sekol - Environmental Professionals Radio (EPR) — environmentalprofessionalsradio.buzzsprout.com
I was on a podcast this week and had a lot of fun talking about Sustainability, ESG, comics, and LEGO.
Don't miss it!