Remember when “sustainable” investment funds were the belle of the ball? It was not that long ago. As recently as the first quarter of 2021, Morningstar reported that global sustainable mutual funds and ETFs attracted a record $185.3 billion in new money as investors of every type clamored to get a piece of the green revolution. Today, things have changed.
Businesses are facing a growing anti-ESG backlash, whereby investor groups, lawmakers and media figures have begun speaking out against corporate ESG initiatives, suggesting they run counter to fiduciary responsibility. This weaponization of ESG has gotten so intense that a recent Conference Board survey of 100 large U.S. companies noted that nearly half have already experienced an ESG backlash and 61% expect it to persist or get worse over the next two years. Moreover, investors have already filed 68 anti-ESG proposals this year, according to the Sustainable Investments Institute, a 76% increase from last year.
Separating Facts from Hype
But how much of this anti-ESG sentiment is driven by sound, unbiased analysis of corporate strategy and risk exposure, and how much is driven by rhetoric, sound bites and overly reductive hot takes that ignore the key issues when it comes to a multifaceted issue like sustainability?
At the base level, few would argue the merits of companies increasingly addressing their impacts on the environment, their employees and members of their communities and the effectiveness of their internal processes and controls. However, the problem is that many are doing so without enough specificity and rigor in their reporting to make a clear connection between these environmental, social and governance-related issues and material risks to the business. In short, companies need to take the subjectivity and feelings out of ESG and sustainability reporting by treating it more like financial reporting.
Getting to the Root of Sustainability
They can do that by clearly defining the sustainability and ESG issues that matter most to their business and their stakeholders and developing detailed reports that illustrate what they are doing to address those issues and chart how they are progressing on that journey. Detailed transition plans are the key here. These clear-cut, time-bound action plans clearly outline how an organization will make systematic changes to its operations in order to meet defined sustainability goals and keep stakeholders involved at all stages. They also provide a useful mechanism to keep the message at the forefront of their minds and up near the top of their board agendas.
In fact, that’s the specific guidance on sustainability reporting that’s been issued by the European Financial Reporting Advisory Group (EFRAG), the body tasked by the European Union (EU) with developing the European Sustainability Reporting Standards (ESRS). A similar approach can also be found in the recent International Sustainability Standards Board (ISSB) reporting standards that will guide the way companies report sustainability information in their financial reports.
While these standardized approaches to sustainability reporting are not as simple as a single score or letter-grade, they also cannot be spun by a marketing department or polished up in promotional materials, without the evidence to back them up. They are quantitative facts about sustainability-related risks and opportunities that could influence an entity’s cash flows, access to finance or cost of capital over the short-, medium-, or long-term.
Financial Reporting Grade Data vs. Armchair Stats
Accordingly, this accounting-style approach to sustainability reporting will not easily lend itself to headline catching promotional top-ten lists of companies most likely to hit net zero emissions targets or allow for scorekeepers to track which companies have the best ESG stats. That’s a good thing. In our collective quest to better understand sustainability and ESG, many of us have inadvertently fallen for the temptation of treating it like a fantasy football draft or a contest to crown the greenest, most diverse or most ethical companies. It should come as little surprise, then, when battle lines are drawn pitting the green team against the red team or the free marketeers against the “woke capitalists.” The fact that these categories even exist should serve as evidence enough that the current state of ESG reporting has gotten away from its original intent.
Oversimplifying ESG and sustainability does a terrible disservice to those many companies, investors and stakeholders who have been doing the hard work of implementing strategies and reporting their efforts to align values with value.
Sustainability is an exceedingly complex concept. It is not going to be magically achieved with a press release or derailed by a proxy vote. The companies at the center of the issue—and the investors and other stakeholders who care about the sustained viability of those companies—are already taking a closer look at the fundamentals. It is the rest of us who need to stop getting distracted by the noise.
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