The global ESG movement took a hit this week, as an investor-driven climate change push at some of the world’s leading fossil fuel companies fell well short of the mark. On 31 May, shareholders at Exxon and Chevron decisively struck down a number of climate-related measures, such as provisions that would have required the companies to curb greenhouse gas emissions and release new reports on climate benchmarks. The votes come just weeks after shareholders at BP and Shell rejected similar environmental measures, and as dark horse U.S. Presidential candidate and activist investor Vivek Ramaswamy is trying to spearhead a global anti-ESG movement.
Ramaswamy’s efforts to use his investment firm Strive to steer the corporate titans in which it invests – including Apple, Chevron and Disney – away from ESG policies like carbon emissions reduction and diversity and back to the bottom line have endeared him to right-wing circles fond of railing against so-called “woke capitalism”.
Yet Republican criticism of ESG as a Wall Street-driven, leftist agenda lacking a political mandate has begun to ring hollow given recent revelations of lawmakers publicly bashing companies with ESG strategies while quietly accepting their campaign donations. Even poster-boy Ramaswamy has begun softening his stance, positing in January that investors can pursue environmental objectives given appropriate shareholder transparency.
ESG’s coming-of-age story
Indeed, despite pointed criticism by the likes of Ramaswamy and occasional setbacks such as the recent votes among fossil fuel giants’ shareholders, the ESG movement remains robust and vital in ensuring the corporate world helps tackle the global problems it has historically perpetuated, with companies like France’s Natixis and Switzerland’s SICPA emerging as innovative leaders.
The roots of ESG – an acronym for environmental, social and governance – lie in academia, with forward-thinking economists like Harvard’s Michael Porter advancing the notion that the private sector should reframe conventional conceptions of value and responsibility. In short, beyond a narrow focus on generating immediate profits and returns for shareholders, firms need to factor in a wider set of societal stakeholders as well as environmental impacts when making operational and investment decisions. The investment community, in turn, rapidly began incorporating these non-financial considerations into risk and opportunity analyses.
Facing rising climate change and social injustice-linked demands from consumers, employees, regulators and investors alike, ESG has shot up the corporate agenda in recent years. But beyond its social and ecological benefits, an ESG-driven business approach is also good for profits, with McKinsey pointing to studies revealing a positive link between ESG performance, equity returns and risk reduction.
Private sector path to profit and purpose
Over the past decade, the private sector has increasingly displayed the possibility for businesses to do good while performing well. Driven by the leadership of asset management behemoths BlackRock, State Street and Vanguard, ESG funds have soared to nearly $35 trillion globally, representing roughly one-third of the US and Western Europe’s total managed assets.
Beyond the wealth management pioneers, ESG progress has strongly depended on corporate action. French investment bank Natixis has been making waves in this space in recent years, particularly in fueling the roll-out of sustainable infrastructure. Natixis has emerged as an innovative investment leader in green sector projects, from renewable energy – where it occupied the third place globally in 2021 – to district heating and data centres, earning it the distinction of “ESG Infrastructure Bank of the Year” at the IJGlobal ESG Awards in the same year. Crucially, Natixis has merged its energy and infrastructure departments to help its oil and gas clients accelerate their green transition.
Like Natixis, Swiss private security firm SICPA has also made concrete progress on the ESG front, focusing on actively transforming its operations. While many corporate ESG efforts focus on the ‘E,’ – namely emissions reduction – SICPA has not let its green ambitions overshadow the ‘S.’ For the third year running, SICPA has been recognised as one of the best employers in Switzerland based on employee satisfaction. This culture of well-being equally extends to its suppliers, whom SICPA requires to abide by a Supplier Code of Conduct encompassing ethical, environmental and human rights principles, as well as the local communities of its overseas operations, where SICPA has delivered a clean water initiative in Pakistan and an indigenous tree planting project in Kenya.
Regulating greenwashing out of existence
The private sector has driven the ESG momentum so far, but corporations and investment managers will need governments to set the right regulatory stage to build on this progress and unlock the full potential of ‘stakeholder capitalism.’
Ideologically-driven attacks from political conservatives aside, the ESG movement has faced valid criticism over its lack of common definitions and standards, as well as inadequate compliance and accountability mechanisms, opening the door for greenwashing and unrealistic financial and societal commitments. According to NYU finance and ethics professor Michael Posner, “ESG investing can be improved greatly, if properly defined and applied,” while bolstered frameworks can “give investors…a means of evaluating companies by common standards” and identifying those making a meaningful social and environmental impact.
Posner rightly highlights governments’ responsibility in mandating companies to improve ESG data disclosure and providing broader regulatory oversight, which should lead to what corporate sustainability expert Gayatri Divecha envisions as the “alignment of international standards” under a universal framework and “action and progress” prioritised above commitments.
In this regard, the EU has emerged as the clear regulatory powerhouse, with its world-leading standards lighting the path forward. Last year, the European Commission adopted an innovative due diligence proposal on corporate sustainability to enhance ESG compliance across global supply chains via well-defined legal obligations on companies to identify and mitigate human rights and environmental-related externalities. At the domestic level, Germany and a coalition of other EU member states have also stepped up with their own due diligence legislation to embed ESG in supply chains.
By levelling the ESG playing field and boosting transparency for consumers and investors, these kinds of regulations can help the private sector accelerate green transitions and social change. While cynical critics erroneously pit profit and purpose against each other, the cracks in their arguments are coming to light, paving the way for a wide, much-needed ESG expansion around the world.