There is so much noise now surrounding ESG, impact, climate, DEI, Woke, Anti-woke, VCM, COP, Net Zero - and none of this is coming close to delivering the sort of results most people desire and that life on earth going forward requires.
So what do we really need to do?
My suggestion is 3/5/7/10, and we need to get started at once, not only on agreeing on this common approach and methodology but implementing it on a global basis.
Let’s take these in reverse order, starting with the 10.
We see 10 misunderstandings about ESG being put forward in the media in recent years and here’s how to correct these misperceptions. As recently as 2021 there wasn’t this mass confusion, but now that sustainable finance is finally important and mainstream, we have had a litany of miscommunications and confusion. What we need to keep in mind is that:
ESG is in fact hundreds of different issues and not a single thing, so let’s stop treating it that way (attention everyone in the media), the danger of oversimplification couldn’t be clearer.
Sometimes ESG data can help but we have to be more specific as to how (ESG data is a useful potential red flag indicator on corporate behavior, for example)
However, ESG data also has a long history of being oversold, and this needs to be recognized and accounted for (ESG data as it stands often does not identify what companies need to do differently, or as Valery Lucas-Leclin, the great, recently passed sustainability expert who contributed to our first book suggested in 2022 that ESG data is not results oriented but needs to become so)
Standards can and do help, but they need to be clearer on what they are and are not, and what they can and cannot do – am not a big fan of the histrionics around this, but standards indeed continue to oversell what they are and what they can deliver and not, especially as pertains to the ISSB
The same is true of the TCFD (which is of course aligning now with ISSB, which is also welcome)
All of that said we welcome increased disclosure requirements, such as the hopefully inevitable SEC climate disclosure rule and the SFDR and other recent EU regulations, even if they are all works in progress, as transparency encourages action. We have seen this with our own eyes at senior levels of corporations and investment institutions.
And the same is true of Net Zero commitments as well, but the danger here is that Net Zero has created an illusion that may well not be able to be fulfilled by affordable technology in time (DAC, CCS, SMR and Hydrogen, for example)
Sometimes investing can help when it comes to ESG issues, but not always (and please let’s stop using the phrase ESG Investing – there are Seven Tribes of Sustainable Finance, and they each act differently (more on this just below) and have varying degrees of success – PRI and whatever remains of today’s financial media more generally please take note and cut it out)
Accusations of greenwashing are a good thing, not a bad thing, as it helps encourage authenticity, and finally
There are ways and methods that sustainable investing is effective and transformational, but we need to be honest about what works, and more focus is needed on scaling what is working for purpose.
This last bit is why we teach as much as we do at Brown, Harvard, HKUST, NYU and Yale. Legitimacy is an imperative and we need to be much more honest about what is and isn’t working.
The 7 of the 3/5/7/10 refers to the Seven Tribes of Sustainable Finance, something we have written extensively about before, and further to the above, call the entire field what you will: Sustainable Investing, ESG Investing or Impact Investing, it really isn’t one thing at all, rather these seven very distinct approaches, which need to be analyzed separately as financial and societal outcomes will differ by approach.
We first of all have negative screening, or more recently calls for divestment from companies if not entire sectors. This tends to be a feel good option that has never in practice actually led to different real world outcomes, and financial performance can be poor. It is also where the field of what used to be called socially responsible investing started. It would be fine if this became a majority of AUM, but that is not anywhere near close to happening, let alone impossible in many parts of the world, especially in developing countries, Asia, etc. Feel good approaches need to give way to more positive solutions oriented approaches, something we have been encouraging in all of our books over the past 15 years.
2. The reverse, positive/best in class approaches, often do lead to financial outperformance and success for investors who take this on, such as our most recent research has showed, with implications for those being caught up in the anti-ESG movements being fostered by attorneys general in some US states. We have a lot of time for this category, where you seek companies inventing solutions while making more money. Climate Tech VC is in this category as well, so it isn’t just public companies, and there is much future potential for this to become the driver of success in Asia, and for active management more generally.
3. Impact investing often is private investments helping the poor gain access to services and to solve for important issues such as poverty alleviation. Again, very different than the two strategies just above, so we have to examine these individually. Definitely check out the work of the GIIN and their Navigating Impact platform for approaches, themes, evidence and metrics, where we helped develop their Clean Energy theme most recently.
4. Thematic investing, often investments in water infrastructure or renewable energy project finance are again different and crucial. Check out our recent InvestNYC and the SDGs NYU paper for examples of how to solve the SDGs with specific tranches of finance.
5. ESG Integration has a lot of pushback on it now, but it is often the choice of the largest investors. Big questions here given ongoing greenwashing concerns. Putting ESG data on everyone’s desk and claiming ESG is covered has cost one major financial services CEO their job already.
6. Shareholder engagement is a main concern of US corporations, given changes to board members at ExxonMobil in recent years, for example. A big focus for some time now, and some large pension funds do nothing more than this, as opposed to the other categories above, but here in 2023 questions about efficacy abound, much as this area of work remains important as a check and balance mechanism otherwise missing from how shareholders and the companies they invest in interact.
7. Lastly, we have minimum standards, check out New York State or Norway’s climate focused plans for this sort of approach. If you visit a restaurant in Manhattan, there’s a letter on the window telling you whether you can trust the food, yet we don’t have that largely for investments. The potential for minimum standards in Asia, for example, would also appear to have great promise going forward.
Seven different categories of strategy, yet they are all too often lumped into a single bucket, and that needs to stop.
This takes us to the 5.
The five things we need to push on hard, and at the same time, include
1) maximizing corporate sustainability action, 2) maximizing investment through the above 7 categories (goal: a majority of global investment takes up the categories above), 3) we also need ongoing innovation, such as Bill Gates often rightly suggests, yet his book doesn’t use the word corporate once, and 4) often ignored, the all too often missing category of building of a global consensus to act meaningfully on climate and impact, so that consumption and voting decisions become aligned and are made to the point that a difference in actual real world outcomes is experienced, only then can 5) policy help.
Policy requires a global consensus, without which governments will switch away from what is necessary. Here is why we don’t understand the COP process, first we need to build a bottom up global consensus for necessary action, not start with policymakers, let alone assuming we can ever get them to all agree, as is necessary under the UN charter and approach.
But what is necessary action?
We have a world of 200 or more countries each with different realities and challenges which can seem very daunting in the face of looming climate change and other impact categories.
This leads us to the 3 of the 3/5/7/10.
More than anything, we need:
Country specific roadmaps for the changes that need to occur around the world. What is needed in the West is different from countries such as Indonesia, India, China and Malaysia, let alone all of Africa and so on. Asia is already half of the world’s economy. We cannot solve climate change in the West alone, which will amount to only 20 percent of energy demand in the decades to come as Asia continues to rise economically, becoming something of the 20 of the 80/20 result as a result by definition. Yet, for example, the US approach is completely domestic, this needs to change, and pathways to global cooperation and collaboration must be formed.
We also need to recognize that the money simply isn’t there for the transition in many countries. Fingerpointing at the World Bank and similar institutions isn’t the answer here either, as development banks do not finance annually anywhere near the missing trillions often cited in the literature such as this recent piece by BNEF. The missing trillions will have to be created, and this will likely require a new Manhattan Project/Bretton Woods type approach, yet instead we do annual COP dog and pony shows, rather than rolling up our sleeves and figure this most essential element out. This is the most important thing we need to do right now.
Once we do 2. above, we then immediately and in parallel need to build a global consensus, a majority of people in the world, wanting this action to take place.
Only through this sort of bottom up global coalition of the willing, rallying around a newly developed agenda, with specifics for every country, can we achieve a true global majority, dropping the normal fences of geopolitics to allow for actually make the changes we all require happen, that will benefit all.
This is the only way out, the alternatives are dire and climate change effects are already upon us, so let’s get going.