The ESG Advocate 016 - Politics, Promise , and Peril!
Contrary to the calls that ESG is over, it should be renamed (or really that it should be integrated), and executives are backing away and pausing (more on that below), there has been positive affirmation this past week that ESG is indeed good for business.
Not only that but addressing sustainability efforts today will lower transition costs in the future. There is even no shortage of recommendations to get started!
Inertia is powerful in business, but procrastinators are running out of excuses to ignore ESG and sustainability issues. Yet, one big peril looms on the horizon: recession.
Let's get to it!
Previously in politics
But first...recently, conservative states have pushed back on ESG as a 'woke' agenda of values, citing legacy ESG investing strategies like fossil fuel divestment. I'm tired of writing about this, but it is an ongoing concern. This week, let's look to Elizabeth Meager for help. She mapped the polarization of ESG in the US and explained how conservative states are responding to ESG investment strategies (which they believe to be a boycott) with...wait for it...a boycott of their own.
The summary was published before the announcement that Louisiana is pulling $794M out of BlackRock for the firm's ESG policies. Republican State Treasurer John Schroder said this:
This divestment is necessary to protect Louisiana from mandates BlackRock has called for that would cripple our critical energy sector.
This comes about a month after Louisiana's Democratic governor, John Bel Edwards, announced a $74.5M state and federally-funded project that "creates a roadmap for decarbonizing Louisiana’s manufacturing sector while creating new energy jobs" and helps meet the state's 2050 net zero goals.
Are these two things coincidence or irony? I always forget. I suppose it's the former.
Sarah Bloom Raskin, former deputy Treasury secretary, weighed in on the anti-ESG risk over at The Financial Times, calling out a new potential risk. She predicts a chance of decoupling of risk management and underwriting along the anti-ESG states' path. If you ignore ESG risks, prices are not set appropriately, and insurance valuations become a hot mess.
While this hasn't manifested yet, it is a slumbering risk.
Meanwhile, some states are pushing back on the anti-ESG rhetoric. Oregon State Treasurer, Tobias Read, gave a great analogy of what ESG is about:
...why would you say I’m driving a car and I’m going to limit myself to looking in the rearview mirror to decide how I’m going to make decisions about the direction here.
In other words, who would ever make a decision with a limited view? I like this analogy so much that we're going to build on it.
Risk management is like backing a car up while looking in the rearview mirror. You can see financial warnings that may be closer than they appear and decide to back up or stay put. But that rearview camera mounted on the trunk lets you see everything going on, including that tricycle parked right behind you.👍
ESG is like that rearview camera. It supplements the limited financial view with material and relevant data, giving you a complete picture. When a more informed decision is made, the results speak for themselves.
ESG leads to sustainable growth
As if the klaxons were going off alerting rational people to mounting anti-ESG moves, this week saw a new report calling out the connection between ESG and sustainable growth.
Moore Global worked with the Centre for Economics and Business Research (Cebr) to investigate ESG principles across 1,262 large firms. The report has a couple of numbers worth mulling over.
Companies that placed importance on ESG have seen their revenues go up by a collective $3.1T (page 8)
Companies focusing on ESG are growing sales at twice the rate of those uncommitted (page 8)
Revenue growth (10%) outpaced profits (9.1%), which may be due to some required changes/pivots around ESG, but still outpaced the uncommitted company revenue (4.5%) (pages 9, 2)
The study also found that ESG-focused companies had slightly better access to capital and headcount growth than their peers.
If the quantitative argument doesn't appeal, perhaps the qualitative side of the argument will. In its 2022 CEO Outlook, KPMG reported the downside of not meeting ESG objectives. As I stated last week, these core issues represent ESG risks, which can result in costs if not managed. Check out KPMG's downside list.
These concerns also manifested in Bloomberg's GOP Attacks on ESG May Be Overlooking US Workers last week. In this read, Nikita Singhal, co-head of sustainable investment and ESG at Lazard, sets the record straight on ESG.
This is not about virtue signaling or a political view, but rather an investment hypothesis that businesses that have sound human capital management practices, especially in human capital intensive industries, will outperform their peers all else equal
And so, it is unsurprising to see KPMG conclude this:
CEOs increasingly agree that ESG programs improve financial performance, which includes being able to secure talent, strengthen employee value proposition, attract loyal customers and raise capital.
Yet, despite this, the threat of recession looms large to address these issues.
As economic uncertainty continues, 50 percent are pausing or reconsidering their existing or planned ESG efforts over the next 6 months, and 34 percent have already done so.
I'd recommend CEOs heed the words of two people who are smarter than me from this WEF read. First up is Guy Miller, Managing Director and Chief Market Strategist at Zurich Insurance of Switzerland:
Technology is creating immense opportunities, as is ESG. Those who navigate this will be the ones who adapt best.
Next is Rima Bhatia, Group Economic Adviser at Gulf International Bank of Bahrain with:
Integrating ESG principles across the board, whether that's in supply chains, operations or digital transformation, will be critical to companies going forward. Coupled hereto is a strong focus on being data-driven. Companies who live-and-breath ESG and data-centricity will stay competitive.
Remember, ESG isn't the same as ESG investing. One represents companies' issues, and the other is an investing strategy around managing those issues. CEOs that deal with these issues best in a recession and adapt are the ones who will make it through.
The promise and peril of sustainability
ESG addresses risks and may have short-term transition costs for a long-term goal or gain. Yet, sustainability (addressing the company's impact on the world) is often considered concessionary over time, but what if it wasn't? I've long wondered how far into the climate crisis we must go until that isn't the case.
In the news I've been waiting for, the IMF has argued that procrastination on sustainability policy is a risk. It isn't a far leap from 'policy' to 'corporates.' This means addressing core sustainability issues can be ESG.
The IMF shows that if we act quickly with policy, the impact on GDP would be minimal, but the longer we wait, the bigger the issue becomes, and there isn't much time.
The IMF study considered the time to act through 2030. If we started now and ran a gradual change through that time:
...such a policy package could slow global economic growth by 0.15 percentage point to 0.25 percentage point annually from now until 2030, depending on how quickly regions can wean off fossil fuels for electricity generation.
However, here's IMF's assessment if we wait:
Delay beyond 2027 would require an even more rushed transition in which inflation can be contained only at significant cost to real GDP. The longer we wait, the worse the trade-off.
Translating this to a company: if a CEO acted quickly with action, the cost could be minimal, but the longer they wait, the bigger the costs become.
This is why operational reductions and consistent carbon accounting (with future natural capital resource accounting hopefully on the horizon) are critical today. Still, when talk of recession is thrown around, even this argument fails at the CEO's door because belts get tightened.
So, what if funding some of these projects was less of an issue?
Declaring The Climate Economy Is About to Explode, The Atlantic wrote an article about the promise and transformative nature of the Inflation Reduction Act (IRA) on America's businesses.
Historically, economists and businesses have treated helping the environment as a product of prosperity—if the economy is good, then companies can afford to do the right thing. But the IRA’s programs and incentives will keep flowing no matter the macro environment, which makes betting on clean energy one of the most certain economic trends of the next few years.
It is too soon to know if the IRA will help sustainability weather the storm (the most unfortunate wording to use here). But, in today's high-accountability world, stakeholders will see CEOs pulling back efforts and adjusting their engagement accordingly. It will be interesting to see who jumps and restates their sustainability commitments first.
Where to start as a recession looms?
Whether you are a CEO reading this or literally anyone else at a company, it can be difficult to get going on these efforts. After all, we're talking about adjusting core business processes, technology, finance, science, and more.
Suppose you're a passionate individual looking for a place to start amid this complexity. In that case, there is a helpful new guide in Harvard Business Review on The Essential Link Between ESG Targets & Financial Performance. It is worth checking out the ESG path they recommend, especially because it includes real examples.
For fun, let's reword the six steps they've outlined and add some commentary.
Start with materiality. After all, this is what matters to your company. This quickly gets you past philanthropy (always still great) and into your real issues. If you're lucky, you'll address a risk. If you are really lucky, someone will tie materiality with philanthropy or new products to drive a meaningful impact.
Focus on new business models and strategies. Disclosures will come. Driving toward a sustainable business model is infinitely more interesting than disclosing metrics. You'll get there.
In the new world of ESG, you can no longer ignore externalities. Make sure you are accounting for them somewhere. Otherwise, you will find yourself in trouble. Plus, if you only look at financials, you ignore your intangibles. ICYMI, intangibles are a BIG deal. Side note: don't ignore your tangibles, aka. physical assets and climate risk, either!
SDG17 is Partnership for the Goals. While the SDGs are not focused on ESG, the premise is the same. No one can fix these complex issues alone or in a vacuum. Check your pride and look to your stakeholders for help.
Since ESG is core to the business, you must look at your culture and compensation models. If you don't, people aren't going to understand what you are trying to accomplish, which is a HUGE missed opportunity.
Get good at storytelling to investors (and all stakeholders). Bring them along by putting them at the center of your story. I can't tell you how many companies hold back quality information from their CSR reports and press releases. You don't need to get into the weeds, but you must explain what you are doing around ESG and sustainability topics in a high-quality manner.
As an English graduate, I can't stress that last point enough because it intersects with two key ideas:
Your story is an intangible that has value.
If you don't get this right, you will be accused of greenwashing and will get it right the next reporting cycle, which is likely a year away.
Tweets of the Week
I'm curious to see when the SEC will wrap up its review of comments on its climate risk disclosure rule and get something out there.
Just a reminder in case it comes up 👇
And for the first time, a second Tweet of the Week. This one is just too good for fans of sustainability!