By Garry Bowditch*
A version of this opinion piece appeared in the Australian Financial Review on Wednesday, 16 March 2022
Over a decade ago, the world that birthed the ESG juggernaut had not fundamentally changed from today. Instead, high-level principles and manifestos helped build a wall of money, a platform for announcing good intentions, but real change and impact is missing.
There is an urgent need for an honest conversation about rescuing ESG from complacency. Loss of transparency and more delistings of assets from public exchanges like Sydney Airport make ESG friendly investors more critical. But, are they up to the task to tackle entrenched and systemic problems across its three domains: environment, social, and governance systems when accountability and public reporting is so unreliable?
Bloomberg expects ESG funds to exceed $US53 trillion by 2025 and account for one-third of all assets under management. Such an eye-watering pool of funds should suggest we are amid an ESG revolution. But, unfortunately, the answer is far from clear.
One take-out of the last decade is how hard it is to assess an organisation’s ESG performance. Lack of rigorous conceptual frameworks, quality data and corporate cultures shunning transparency undermines convictions. Vagueness in defining what good looks like – both in transition and its final state needs replacement with precise and clear thresholds of ESG performance.
A big part of the problem is that too many ESG proponents focus on an organisation without proper consideration to the environment, geopolitical, economic, industrial and social systems. The founders of ESG had got this right in principle, but unfortunately, as it grew in the marketplace, concepts and methods have drifted into being too myopic and strident. Urgent action is needed to get ESG connected back to systems thinking.
BHP’s Mike Henry typifies CEOs at the pointy end of the ESG journey. As a global mining and resource company, they dig up the planet and disrupt the environment daily. At the same time, their research and output of precious minerals and metals enable new technologies to decarbonise economies and power up renewable energies. But, equally, efforts to eliminate modern slavery and increase diversity can be overshadowed by a more zealous focus just on the environment.
No doubt, BHP brings a ledger of positives and negatives to ESG, just like most organisations. However, knowing the sum of their impacts implies more risk and uncertainty, or a pathway to something better would be helpful guidance.
ESG proponents should step back from its stridency – labelling some sectors and organisations’ pariahs while being unclear and imprecise about what constitutes good ESG.
Only weeks ago, defence stocks were shunned on the MSCI by many ESG investors. But their potential contribution to repelling Russian aggressors in Ukraine has prompted a change of heart. Unfortunately, some ESG institutions have somehow thought that democracy and state sovereignty is a magic pudding while overlooking the ESG benefits implied from military power and maintaining the integrity of national borders.
Again, geopolitical systems matter and understanding them remains too weak.
Similar oversimplifications abound. During COVID, remember the speed at which alcoholic beverage companies switched production to cover the shortfall of hand sanitiser? They did this when demand was already strong for their regular products and their decisive actions were an outstanding example of corporate citizenship in a time of need. Yet there has been little recognition given to this in the ESG universe – where alcoholic beverages are pariahs.
These issues pop up in many areas requiring analysts to understand the context and balance nuances to arrive at an informed ESG viewpoint. Perhaps analysts would be helped if ESG investing principles could evolve faster from their current state of being too vague that in turn invites arbitrary and subjective interpretations.
Carbon net-zero and endeavours for greater social justice and resilience will throw up plenty of difficult decisions reflecting painful trade-offs. Therefore, it is fundamental for ESG to enable these transitions and not inhibit them with inconsistent methodologies and poorly made judgements made out of context and without sufficient regard to system issues.
It is essential to call out that ESG generalisations and vague principles will no longer cut it. There is too high a risk of damaging organisations making genuine attempts to improve while giving camouflage to others less committed to enacting change.
Redressing the ever more ESG announcements of great intentions and substituting them with decisive strategic actions has never been more critical given the challenges.
A Way Forward
The future of ESG will boil down to the quality of leadership and strength of willpower to bring diverse peoples and organisations together to make a difference. That means the ESG universe must evolve rapidly into a place of inclusive leadership that positively compels all stakeholders to change deeply entrenched attitudes and practices. The weight of ESG money cannot do this alone.
But the immediate leadership task is to encourage much greater willingness to adopt organisational openness and transparency. Too many ESG devotees have been complacent, greenwashing, and cherry-picking data to tell a rosy story. At the same time, hiding failures and the valuable lessons from these experiences will alienate those struggling to do better and diminish trust in ESG’s purpose.
Letting the sunshine into an organisation is the first step to cleansing cultures and decision processes. Regrettably, this is not the language of business, but Mike Henry and IFM’s David Neal could change that, one business at a time.
Until sunlight shines into all institutions, doubt and cynicism of ESG will linger.
*Garry Bowditch is Co-Founder Customer Stewardship Alliance and author BIG FIXES: Building Bridges to an Inclusive Future, available on Amazon.