The ESG Review: Should ESG eventually eat itself?

ESG-bashing has quietened down of late.

For many months, we’ve seen some seminal business media articles pouring scorn on ESG investing as a bubble, suggesting that a reset is needed in light of Ukraine war priorities, and frequently asking why more appropriate and standardised frameworks for reporting aren’t yet available.

But as funds continue to swell, the last couple of weeks have seen much less public criticism. Tesla being removed from S&P 500’s ESG index over carbon, conduct and conditions has flared up again, but mainly into a war of words that S&P waded in on and that invariably have been poured over given Elon Musk’s Twitter intentions and his previous scathing criticism of ESG ratings and short-selling practices.

Amidst this, the third of Greenbiz’s short series of pieces examining the state of some ESG priorities stood out more, as something of a voice of reason.

This week’s article raises a fair and fundamental point: are ESG ratings really necessary? Given the reliance that’s placed on credit ratings agencies in determining corporate risk, do we really need a rigorous assessment system for ESG factors in parallel?

"In the end, it all will converge at some point in time," Kristina Rüter, global head of ESG methodology at ISS, is quoted as saying in the piece. "But for this transition period, we think a lot of input and a lot of learning from the ESG perspective and experience is needed, and will still be needed for a long time, because it's a complementary but completely different approach that involves much more qualitative analysis.”

And that’s really the point, I think. The spectrum of ESG, by any and all definitions, is now so broad, but also reaches so deep, that a granular and often scientific approach is needed to determine actual progress and action - and so risk, as well as real world impact. That level of detail, and applying it via what should in time become standardised ESG ratings, is the backbone of corporate transformation programmes that will invariably be long-term to make them both sustainable and durable.

The article concludes that ESG ratings are necessary, but that they will ideally be a transitional measure, so that in future they’re absorbed into a singular framework for assessing corporate risk and impact, and rating it all. In other words, in time ESG ratings will ‘eat themselves’ rather than being a parallel way of grading business risk.

The same might be said for ESG in its entirety. A framework for driving stakeholder value, methods for reporting success, and capabilities for helping a business to align its interests to the broad outside world will likely always be needed. But the ESG ‘movement’ as it currently stands is not just geared to those broader stakeholder interests, but to driving transformation from a shareholder value focus. A successful movement may well be one that sees the E, S and G subsumed into the fabric of doing business.

How quickly that happens with ESG ratings is debatable. One observer in the Greenbiz article points to 2024, or even as early as next year. Given the enormous challenges the world and its economies face in 2022, my guess is it will take longer, but that as raters acknowledge and begin to act upon the need to bring it all together, momentum will gather, because parallel assessments will simply make little sense in the long run.

As regulators get their teeth further into definitions and declarations, we can surely expect ESG-driven transformation to gather more sustainable pace too, as doubts about ‘greenwashing’ hopefully dissipate and greater rigour is applied to reporting. As a piece in Barron’s summarised this week, forthcoming SEC rules will compel companies to disclose more information on “sustainability issues such as climate risks, human capital management, and cybersecurity”.

And while as communicators we’ve likely spent more time on environmental and workforce disclosures, given geopolitical forces we can expect cybersecurity to rise up the ESG priority list.

The ESG News Review is written by Steve Earl, a Partner at BOLDT

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