17 Years Into ESG: Sustainability Reporting Isn’t the Same as Sustainable Investing
ESG reporting has grown dramatically since its introduction. Today, nearly all large investors utilize ESG research to some degree. According to the Global Sustainable Investment Alliance, social responsibility investment now accounts for 1/3rd of all professionally managed assets.
Yet, during the same period, carbon emissions have continued to go up, environmental damage has increased, and social inequity – both in corporate environments and on a global scale – has accelerated. That’s in direct contrast to the goals of ESG reporting, which is to force management of ESG factors, link good sustainability with better long-term returns, and put pressure on lagging organizations– while pushing ongoing improvement to how we measure and report social and environmental impact.
Instead, measurement remains imprecise, nonstandard, and sometimes, misleading. In fact, 8 out of the 10 largest ESG funds invest in oil and gas. And, as many experts point out, the focus on getting ahead with good reports could be distracting from the need for real changes to mindset, regulation, and corporate behavior.
A good report doesn’t mean sustainable investments
ESG factors affect the bottom line as well as the business reputation, and that is forcing both business leaders and investors to recognize that there’s a risk associated with not managing ESG factors. Most organizations recognize that these investments are worthwhile. Managing ESG issues lowers the cost of capital by reducing risks and focusing on sustainability can improve margins while increasing brand value.
At the same time, many large investors have entire teams dedicated to doing reporting and ensuring reports are handled well – so they score well. But, does beautiful reporting reflect beautiful investing? Not necessarily. Instead, ESG reporting remains as problematic as when it was introduced.
- 90% of the world’s largest companies produce CSR reports – but very few are validated by third parties. That’s in contrast to financial reporting
- Significant portions of production and even labor have moved overseas. Many organizations find it difficult to trace actual carbon footprint or real impact
- Scope 3 emissions (usage of products sold) are especially hard to measure. Yet, for many organizations, they represent the bulk of environmental impact
- Impact data varies significantly per methodology used. E.g., Coca Cola wavers between reporting 2 liters of water to produce a bottle of cola to 70 liters depending on methodology used for the assessment
- Without standardization, there is no consistent rating across funds, in fact, ratings by the top 6 ESG firms correlate by an average of 0.54
At the same time, the metrics behind what makes a good ESG investment are often not good enough. For example, negative screen – a term used to refer to funds that become sustainable by excluding investments like firearms – are common. In reality, that means there’s often little difference between the holdings in ESG vs traditional funds.
Performance is rewarded, sustainability isn’t
The United Nations’ Intergovernmental Panel on Climate Change (IPCC) report was published on the last day of February 2022. It clearly states, yet again, that climate change is a threat to human wellbeing and health of our planet. As for good news, taking action now can still help us to secure our future. But we need real actions delivering real change.
Yet, if we’re rewarding portfolio managers based only on current asset returns, how are we incentivizing them to invest in circular and sustainable organizations? And, if we’re still investing in oil and gas, it is those oil and gas companies that have the capital to grow – not the sustainable companies we want to see in the future. If we chase short-term profitability – we will never see long-term sustainability.
Today, most focus on ESG initiatives centers on performance and ensuring neat reporting. But, if the goal is to create social and environmental sustainability, we should be looking at actual, long-term impact instead. We should be reporting because we have wonderful things to report on, not because we want to create a wonderful report.
“The biggest danger is not inaction. The real danger is when politicians and CEOs are making it look like real action is happening when in fact almost nothing is being done, apart from clever accounting and creative PR.” – Greta Thunberg
Where does your company stand?
If you’d like to have a conversation around this, or any other ESG topic, ACE Is here to help. Feel free to reach out to us.Back to Moving beyond ESG reporting to driving lasting impact