Perhaps it is nothing more than a sign of the times that ESG proponents currently find themselves assailed by both sides of the divide that bedevils today’s political environment.
On the one hand, US Republicans have begun a broad attack on the notion that environmental, social and governance (ESG) factors should influence investing strategies. Deriding it as ‘woke capitalism’, Florida has passed a resolution barring pension fund managers from taking such issues into account, while Texas has ordered state retirement and school funds to divest holdings in financial companies that are “boycotting” the fossil fuel industry. Anti-ESG funds are starting to gain traction, while a recent survey finds that America’s CFOs largely support these moves.
Speaking at last month’s PRovokeGlobal Summit, for example, New York Times columnist Frank Bruni warned the corporate world to brace for more political attacks, particularly now that Republicans have taken control of the House of Representatives.
“I think Republicans would argue that these are not decisions that look exclusively at bottom line,” said Bruni. “They are about steering the world in a direction that conforms to your ideology or values.”
And yet, Bruni also noted that “younger employees in particular — have different expectations that make it difficult for companies to take a pass [on these issues].” Meanwhile, more activist critics contend that current ESG practices are just another dose of unregulated greenwashing, providing cover for polluters to pretend that they are serious about improving their behaviour, and reaping investment rewards for fancy reports that offer platitudes without progress.
Earlier this year, for instance, German police raided asset manager DWS and Deutsche Bank for misstating ESG criteria in its investment portfolio, while the US Securities and Exchanges Commission (SEC) recently settled with Bank of New York Mellon over allegations that its marketing literature had overstated ESG claims. For similar reasons, the SEC is also probing two ESG funds run by Goldman Sachs.
And the backlash doesn’t stop there. Former BlackRock sustainability expert Tariq Fancy claims the fund manager’s focus on the area is actually undermining climate change progress. The former head of sustainability at Calpers pension fund believes it is time for ‘RIP ESG’ as energy security and poverty reduction become increasingly important amid sustained economic volatility. ESG funds themselves, furthermore, have been subject to fierce criticism for including oil and gas stocks, along with companies that are still doing business in Russia.
All of which comes after a remarkable boom in ESG investing, to the tune of almost $4tn in ESG-labelled funds by the start of this year, and $40tn in all assets that are monitored via a sustainability lens. And that surge has not gone unnoticed by the public relations industry, which has been quick to launch ESG practices that capitalise on the newfound desire for companies to tout their credentials in the area.
“A lot of the [backlash] is the outcome of something getting a little too popularised, and then people jumping on the bandwagon, and then we get greenwashing,” says former Lenovo Asia-Pacific communications and ESG head Genevieve Hilton, who also chairs AmCham Hong Kong’s ESG committee. “Accountability in this area can only be a good thing.”
“There is money and risk involved”
While the political divide may take some bridging, the disconnect between the flimsy rhetoric of ESG reports and the reality of corporate risk management that they are intended to represent is something that communicators must address if they are to overcome the notion that ESG is nothing but hot air.
“Previously, it was about reputation differentiation and greenwashing,” says Jeremy Cohen, a senior partner at Blurred, which focuses much of its work on ESG counsel. “What’s happened is that there is money and risk involved. If you’re not managing your ESG risks, you’re not meeting your fiduciary duty of running a company.”
The theory plays into the modern concept of public relations as a vehicle by which to ensure that stakeholder capitalism involves much more than just shareholder interests, as the Business Roundtable famously put it three years ago. Put simply, it reflects a world in which companies that ignore ESG issues, whether in terms of environmental or social welfare, will suffer reputational damage that leads to the loss of employees, customers, and investors.
“I think there is some confusion out there in terms of what ESG is at the moment,” explains Adam Harper, founder of financial consultancy Ashbury. “In the ‘Fox News world’, it’s become a movement that’s bundled together with various other progressive causes they object to. [But] ESG started out as a way for investors to assess risk in their portfolios, by looking at exposure to environmental, social and governance risks.”
This helps to explain why former HSBC head of sustainable investments Stuart Kirk (who quit his job after being suspended for memorably accusing central bankers and policymakers of overstating the financial risks of climate change) has argued for ESG to be split into two distinct strands: one focused on investors that simply wish to manage risk, and the other on activists that want companies to change their ways.
That distinction may be moot, not least because — as Cohen puts it — taking ESG seriously is “just good business when you take all the politics away.” But in a marketplace that, for now at least, is largely devoid of uniform standards and criteria, corporates have been allowed to voluntarily draw their own conclusions about how well they are meeting ESG risks, with predictable results.
“Companies, and therefore the funds that invest in those companies, have realised we have lived through two decades of greenwash,” admits Cohen. “When you look at the way that companies have reported on ESG issues, in many cases they are not worth the paper it’s printed on.”
“The perennial issue is data,” adds Harper. “Regulations vary in different markets in terms of what listed companies have to disclose. There’s a big push towards standardised reporting and disclosure, but I believe only a minority of listed companies currently do.”
The lack of standardised criteria is, no doubt, an issue — particularly for investors aiming to make apples to apples comparisons. But so, crucially, is the idea that the ESG investment chain — from corporates to investment banks, asset managers, ratings agencies and index providers — can regulate itself. Which may explain why so many countries are aiming to bring in rules that regulate the reporting and auditing of ESG policies and claims.
“The amount of regulation that’s coming in will force companies to flip their attitudes from showcasing to bringing legally mandated transparency,” believes Cohen. “Investors are fed up with the lack of transparency right now.”
“Some ESG champions are demonstrated to be hypocrites”
The financial industry, adds Cohen, needs to shoulder a considerable amount of blame for this, in comments that echo those made by Fancy. “You can’t say we are an investment fund focused on saving the planet and at the same time hold 10% in fossil fuels,” he states. “Some of those big ESG champions in the financial industry are demonstrated to be hypocrites.”
Accordingly, new ESG disclosure requirements from America’s SEC, join several other recently enacted or amended US laws that add teeth in terms of compliance. The Uyghur Forced Labor Prevention Act, for example, has pressured companies to stop using labour from the Xinjiang region, while the Lacey Act addresses the source of agricultural products.
Unsurprisingly, the most robust jurisdiction is the EU, which is rolling out new directives focused on the due diligence and reporting of corporate sustainability commitments, along with the Sustainable Finance Disclosure Regulation, which aims to improve transparency in terms of ESG-labelled investments.
Many more markets, including Hong Kong and Singapore, have mandated specific environmental disclosure requirements for listed companies, with both Japan and India also considering similar moves, the latter in conjunction with its existing responsible business disclosure regulations.
“Stock exchange reporting requirements are trying to put more teeth around financial disclosure, treating climate change [for example] as any other material risk to a business,” explains Cohen. “What the EU is doing is going much further than that — not just in terms of financial risk, but in terms of ethics and transparency. They want to raise the bar and use these regulations to change corporate behaviour. They are also trying to close the loopholes around where your company is based, because there is a large amount of exasperation in Europe at how American companies have played the global regulatory system.”
All of these regulations, furthermore, sit atop a dizzying range of reporting standards and frameworks that have been developed over the past three decades, including the Carbon Disclosure Project, the Climate Disclosure Standard Board, the Global Reporting Initiative (GRI), and the Value Reporting Foundation. The overlapping nature of many of these efforts has spurred more recent initiatives to standardise ESG data reporting, such as the newly formed International Sustainability Standards Board and taskforces on nature-related and climate-related financial disclosures (TNFD and TCFD, respectively).
“Unlike other areas of fiscal disclosure, ESG reporting is not universally mandatory,” explains Ian Rumsby, Asia-Pacific managing partner at sustainability consultancy Stonehaven. “But that is changing fast. TCFD and TCND regulation is expected in 2023 and there is a raft of legislative structures, including the EU Taxonomy Directive, taking shape that will redefine reporting obligations across markets.”
“Can we trust businesses to police themselves?”
Ultimately, Harper believes the ESG backlash is not unhelpful in “sparking a more mature discussion” about the clarity that is required when it comes to corporate communication. “It went from being more or less unknown five years ago, to being extremely high-profile — in the transition, some clarity about it has been lost.”
Cohen agrees, pointing out that it has triggered “more transparency, more soul searching, more standards and regulation.” He adds: “All of this will help the ESG agenda.”
That goes for the acronym itself, which some believe has become too convenient a lightning-rod for the various criticisms levelled by differing stakeholder groups.
“Who cares about the term ESG?” asked Impact ROI CEO Steve Rochlin at PRovokeGlobal last month. “Already, ESG thought leaders are rejecting the term, that’s what we do. So, stop using it, very simple. We’re involved in sustainability, responsible business practices, regenerative business practices.”
Instead, Rochlin thinks that ESG proponents should focus on the broader business case, which he believes “really isn’t that difficult to understand.” Specifically, Rochlin points to the dismantling of the regulatory state over the last four to five decades. “Can we trust businesses to police themselves? ESG is that only answer right now.”
Maybe so, but the onset of regulation, amid rising scepticism about whether companies can genuinely square their profit-seeking motives with saving the planet, suggests that governmental oversight is increasingly required to resolve this particular dilemma. For in-house communications functions and agencies that are often tasked with reporting a corporation’s ESG risks, that calls for a shift in mindset, says Rumsby — from talking a good game, to demonstrating concrete progress.
“Reporting is about accountability, not marketing,” he notes. “Executive KPIs have to be tied to ESG performance to drive ownership and credibility.”
“It’s not the end of ESG, it’s more of a reset”
Whether the broader public relations industry is equipped to handle these challenges remains unclear. There is no doubt that the ESG era has been accompanied by the kind of windfall that suggests there is plenty of money on offer for less scrupulous actors. In that respect, too, the ongoing backlash has not been unwelcome.
“PR firms trying to make money in this area, I would say beware,” contends Cohen. “Too many are doing it without depth and the risk factor for brands in overpromising is much higher than it was before. There’s a big fear of backlash — clients realise that if they get found out, there will be a very negative reaction.”
Like many ESG consultancies, Blurred claims to turn down more work than it takes on — arguing that most briefs are nothing more than greenwashing. As a simple test, Cohen is always wary of companies that want to launch their plan and communicate it at the same time. “First of all you need to create the impact,” he notes. “A lot of traditional agencies are finding clients that are saying we want to do a partnership with an NGO, then they will create a whole campaign around that. But I am seeing clients get a lot more savvy — there’s an evolution within in-house in terms of understanding.”
That reflects how the digital era is continuing to reshape the relationship between business and society, and also underscores why the notion of companies sitting out the ESG debate — whether related to Ukraine, climate change or supply chains — seems unlikely anytime soon. Even so, the recent trend towards ‘greenhushing’, where companies opt against publicising their environmental targets for fear of criticism and regulatory scrutiny, suggests that greater legislation may not necessarily prove to be the promised panacea.
“If there’s an area of concern it’s companies using the imperfectness of ESG reporting as an excuse not to do anything in terms of corporate responsibility,” says Hilton.
As ever, compliance needs to be allied to vision and bravery, particularly amid today’s cost of living crisis.
“I wouldn’t agree this is the end of ESG, but the next year or two will slow down some of that progress, because so much money will be spent to insulate people through this crisis,” says Cohen, who bemoans the short-termism that bedevils much political and corporate thinking. “But it’s not the end of ESG, it’s more of a reset.”