The last few weeks has seen a wave of pushback from highly placed business leaders against environmental, social & governance (ESG) reporting. This hit a crescendo last week when the Financial Mail published a lengthy report that asked: “Can this nascent concept, already mangled by over-eager marketing graduates, be rescued?” (“How marketing departments hijacked ESG”, June 9).
Much of this critique revolves around two key issues: the composition of ESG funds, and the veracity of company level ESG claims. Or more pointedly, who says what is good or bad in ESG terms? How do we know ESG performance is actually making a difference?
Echoing the rapid increase in the value of ESG funds globally, the Southern African investment landscape has experienced a rapid increase to more than $780 worth of impact investment, ESG and sustainability-themed assets under management as of last year. The results, released in last month’s sixth edition of the African Investing for Impact Barometer, echo recent criticisms doing the rounds in the media about the blurred lines between ESG reporting and greenwashing.
The report assesses responses from asset managers overseeing 75% of assets under management in SA and finds that despite ESG integration, challenges of demonstrating and disclosing the impact of ESG integration persist.
The issues raised above remain highly persistent when one bears in mind that some of the world’s largest ESG funds, including BlackRock’s ESG Aware and the MSCI USA, include fossil fuel companies and weapons manufacturers in their portfolios, raising the question “what can and cannot be included in an ESG fund?” The answer to that is tricky and will remain the topic of much back and forth for some time to come, but there are concrete steps being taken in the right direction.
Arguably the most pressing ESG challenge that must be surmounted now to achieve a sustainable future is climate change. As a result, the Science Based Targets initiative (SBTi) recognised the need to develop sector-specific guidance for the creation of science-based greenhouse gas targets. The financial sector is no exception, so accordingly it released a new framework last month that allows financial institutions — including banks, investors, insurance companies, pension funds and others — to set science-based targets to align their lending and investment activities with the Paris Agreement.
Aligned with this are the proposals from the US Securities & Exchange Commission, European Financial Reporting Advisory Group, and International Sustainability Standards Board (ISSB), to make company climate reporting mandatory to enable the standardisation of approaches to climate reporting and provide a foundation for climate-aligned investment and lending. In Johannesburg on Tuesday morning the JSE released the final version of the ISSB-aligned Climate & Sustainability Disclosure Guidance documents.
Along with the introduction of SA’s green finance taxonomy, which classifies green assets, projects and activities along with the internationally aligned metrics to report on their outputs, which in turn fit into globally aligned climate targets for financial portfolio development, we are indeed witnessing the coming together of systemic architecture that delivers real, material climate change outcomes and minimises the scope for greenwashing.
But let’s not forget why this is important. The bottom line. There is a growing mountain of research that shows how high-performing ESG companies are more competitive than their industry peers, leading to higher profitability and dividend payments. Similarly, high-performing ESG companies are better at managing company-specific business and operational risks and as a result are less likely to suffer incidents that affect their share price. They also tend to have lower exposure to systematic risk factors, leading towards lower cost of capital, and demonstrate better operational performance and ultimately cashflows.
Yes there have been issues around corporate greenwashing to capitalise on the ESG boom, but why throw the baby out with the bath water when so much has been done to create credible ESG performance standards while also delivering value to shareholders and stakeholders?
• Maguire is carbon project manager at Climate Neutral Group SA. He writes in his personal capacity.
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