Large corporations are playing the game with ESG. The market needs to be overhauled, writes Matthew Jellicoe, Co-Founder of OnePlanetCapital.
Sustainability is one of the hottest topics globally these days, and for a very good reason. It is very unlikely that the Paris agreement targets of preventing global warming exceeding 2c are possible, 1.5c is now a distant memory. The implications of this on global weather patterns and thus humans are well documented.
Unparalleled change is required to our global economy. We are in the midst of a green industrial revolution and the good news is the world is finally waking up to the substantial changes needed to tackle the climate issues we face.
Decarbonisation is also being backed by all major developed economies including the US and China and huge amounts are being invested in green energy, green technology and services. Consumers are also becoming increasingly driven by sustainability and becoming more aware of a businesses’ green and social purpose credentials.
This is reflected by the massive growth in ESG funds, funds composed of equities with Environmental, Social and Governance at their core. Investors poured USD142.5 billion into ESG funds in Q.4 2021 – this brought world-wide sustainable assets to USD2.7 trillion.
However, there is a growing realisation amongst both retail investors and institutional investors that this in-pouring into ESG funds is not without problems. The FT recently wrote about a potential mis-selling scandal taking shape since so many funds were labelling ESG portfolios for marketing purposes. Tariq Fancy the former CIO for sustainability for BlackRock famously labelled ESG funds as nothing more than ‘marketing hype’.
In August 21 a report by Climate Think Tank Influence Map found that 421 out of 593 ESG funds it profiled were not aligned to the Paris targets in any way. On top of this, Morningstar recently cut 1200 funds with assets over USD1.4 trillion from its sustainable investments list after enhanced due diligence on their make-up. Outside of regulatory change this represents a massive shake up of the ESG industry.
The problem with ESG is that it is a very loose definition of terms and targets which are largely self-policed and not well regulated. The ESG ratings agencies are massively divergent in their assessments which mean any corporate wanting to play the ESG game can often find a ratings agency to complement their business.
This makes it a perfect breeding ground for large corporations to jump on the ESG bandwagon. I’m not saying that any moves by large corporates in the ESG space are ill considered. Any company who is making efforts to combat climate change and reduce global warming deserves merit, and some firms do take ESG very seriously, self-policing well. However, ESG currently is largely and extension of CSR policy – big companies with HR departments and hefty communications budgets can achieve reasonable ESG ratings no matter what.
ESG policies and frameworks lack consistent data points and need updating regularly to ensure that companies are being positively stretched, pushing them to do more where they can. The reality is that some of these large corporations have the capacity and desire to do more, they’re simply not being challenged enough.
The very definition of ESG allows for imprecision. It can mean hundreds of different things. None of which are wrong, but none are right either. Above all, what ESG does in terms of climate change is hide the real problem. While global warming is rising fast, it offers companies the grounds to seem that they’re doing the right thing.
Instead, the ESG market needs to be overhauled, to encourage companies that have the capacity to do more, to enact real change. In reality this is likely to come from regulators. The Morningstar re-rating move a month ago will have shaken up the industry and there are signs that regulators are starting to move – particularly in the EU. The European Securities and Markets Authority has already stated it is looking for a legal definition of ‘greenwashing’ to be used in court.
At OnePlanetCapital we are all about the E in ESG. However, from the outset of the fund we have always had concerns about ESG. Firstly, because it is very hard to apply in the Venture Capital space in relation to early stage companies who don’t have bandwidth to communicate extensively about ESG frameworks and so on. But mainly because it was clear that it was a tool that was not fit for purpose.
As a result, we use the United Nations Sustainable Development Goals as our own benchmark. This should be standard practice for ESG measurement. It sets a much clearer benchmark for positive impact, and we only invest in businesses that score well across key UNSDG metrics such as climate and environment.
There are also a myriad of early stage companies coming to market now that make the adoption and policing of environmental metrics much easier. For example, SaaS type platforms that are able to track C02 emissions across complex supply chains. Companies such as Earthly.org and Aklimate and many others offer data analytics around emissions and have been coming to the market for the last two years. So, the data sets required to police ESG more effectively are developing fast.
We are seeing huge numbers of pipeline companies that are enabling the corporate world to measure the E of ESG effectively and also a lot of companies that help mitigate emissions and reduce environmental damage. The tools are now coming into place for ESG to become a lot more rigorous and analytical.