We dig into the high points of ESG reporting, where the backlash came from, and what happens next. Hint: It's still going to be around for some time to come.
ESG is becoming more mainstream, one of many considerations for companies as they develop their strategies—and this is a good thing. The importance of ESG issues may rise or fall depending on the type of decision a company is making. Whether ESG is bad for business isn't really the most important question. The important question is what a company is reportng and what its results are over time.
The goal of ESG reporting is transparency
At its heart, environmental, social, and governance (ESG) reporting is designed so companies can public their metrics against various standards. These metrics include emissions data on the environmental side. For social metrics, they include number and demographics of employees, seniority, safety incidents, etc. Governance is concerned with how the business operates and how its board oversees it.
The goal of ESG standards is to create a common rubric so investors can compare companies' non-financial performance. The standards can help investors look under the hood to identify potential liabilities that might make them more or less interested in investing. If two companies have comparable profits but one has zero employee fatalities and the other has several dozen, an investor might choose the company with a stronger safety record.
This example shows how ESG standards alone don't require changes in behavior from companies. Instead, making the data available might lead investors to urge a company to make changes.
ESG has become politicized...
Because certain ESG disclosure topics like emissions data or diversity sit at the fault line of cultural divisions in the U.S., "ESG" itself has become a wedge issue. This is when we started o see the question arise of whether ESG is bad for business. The issue gained prominence as some heads of large investment banks, like Larry Fink of Black Rock, made climate mitigation a major talking point for the banks.
Some states like West Virginia and Texas saw these investors' decisions as a major threat to their fossil fuel industries. In response, they are divesting from institutional funds that consider ESG factors in making their investments.
Now, we are seeing large investors start to moderate their stances on ESG issues in response to backlash.
...But regulations are coming
Despite backlash by some states who say ESG is bad for their economies, a number of countries and even other U.S. states are starting to mandate some type of ESG reporting. Most prominently, in 2023 the European Union passed the Corporate Sustainability Reporting Directive and California passed requirements for large companies to report on climate and emissions performance. Since these regulations address companies of a certain size that operate in these jurisdictions, even companies headquartered elsewhere will soon face mandatory requirements.
The U.S Securities and Exchange Commission is also working on a climate disclosure rule, but it is taking a long time to complete the rule so it can attempt to preempt anticipated lawsuits.
So is ESG bad for my business?
ESG is here to stay, given the new regulations mentioned above. So it almost doesn't matter.
And yet, it does. Fifty-one percent of U.S. investors say poor ESG indicators could cause a deal to fall through, according to a recent KPMG survey. Emphasizing this further, over 60% said they would pay a premium for impressive ESG metrics.
ESG indicators can highlight strong performance or point to challenges at companies that might make them unattractive. And that matters.
On the flip-side, investors in the UK withdrew from over $1.3 billion from social- and environment-focused funds in just the last quarter, Reuters reported. Reuters noted this as a larger trend away from stocks and equity funds, and towards bonds and money markets, amidst concern about a global economic slow-down. So while ESG isn't the reason investments are being withdrawn, it also wasn’t convincing enough to keep them in place.
All this is happening as IEA reports that global investments in clean energy is estimated to be $2.8 trillion, well surpassing the approximately $1 trillion dedicated to oil, gas, and coal.
Waters are murky, but since ESG is here to stay, you might as well jump in.
The Bottom Line
Companies should dig deeper into their own sectors and strategies to get a more tailored analysis, the surface conclusion seems to be that implementing ESG policies won’t risk potential deals and investments. In certain areas, it may even be an advantage.
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