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The ESG Review: Are carbon cost hikes the way to give ESG bite?

A certain U-turn might be the story of the week.

And while the value of ESG to business is not an issue that has not done a 180-degree pivot, over the course of this year we’ve certainly seen some wide-arc meandering.

Back in March the question was whether the invasion of Ukraine would pose the biggest test yet for an ESG world that still lacked definition. But we then saw enforcement action on, and got the the point where media was asking whether ESG was at a crossroads over its future.

War and economic crisis were always going to test its mettle, regardless of the work done to advance standards. The reason, as this summary in The Economist now concludes, is that when you boil everything down, what you’re left with is the simple fact that “companies can help save the planet—but only if doing so is good for business.”

Hang on though, you might say, hasn’t the rise of stakeholder capitalism taken us beyond that, so that society and the world we live in should also benefit from commercial activity, as well as corporate shareholders?

Yes, for many. But there are also many voices proclaiming that when times are tight and the near-term future is uncertain, the interests of shareholders will always top the pile.

The central thread of The Economist piece is that it should ultimately be governments that force change, rather than business, through legislation that makes profit maximisation and environmental safeguarding a common goal. “The best way of doing this is to set a high enough price on carbon, forcing companies to internalise the costs of their dirty activities, so that going green is also good for the bottom line,” it says.

This of course raises the question of whether, current crisis aside or at least evolved, the blunt instrument of raising the cost of carbon to a business by charging for what it creates is the only realistic way to shake off all of the questions that have been raised about the viability of ESG?

In other words, to make tackling climate change net-positive for business and those with a direct financial interest in it, rather than something that may increase multi-stakeholder value depending on how standards are set and markets respond?

That would surely need to cover Scope 1, 2 and 3 emissions, so everything from direct carbon output to that caused by data processing to what is created deep in supply chains.

Across the EU bloc, the impending ‘Fit for 55’ legislative package is set to bring pricing directly into the decarbonisation equation, while quite what the UK Government intends to do in parallel remains to be seen.

In another Economist article about how investment giant BlackRock is faring in ESG’s culture wars amidst “woke-ism”, innovation is outlined as a path through the tension over ESG investment - presumably both innovative approaches to making ‘business for good’ better for shareholders and investors, and technological innovation energising more sustainable, and financially attractive, transformation.

Meanwhile, the calling out of greenwashing and glossing of ESG credentials shows no sign of slowing, as covered in another Reuters piece this week. So with goals under the microscope over their definition, how they’re reported and what level of appetite investors have for them, perhaps making the cost of carbon hit the bottom line directly is the arrowhead all of ESG needs.

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

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