In the US, the Securities and Exchange Commission is responding to the reality of an overheating planet by asking corporations to report greenhouse gas emissions, including in some cases so-called Scope 3, the widest possible gauge of their carbon footprint. At a global level, there is fast emerging a standard for corporate sustainability reporting intended to make disclosures as consistent and transparent as financial reports are now, thanks to decades-old general accounting standards.
Sonali Siriwardena, partner and global head of ESG at Simmons & Simmons who advises some of the world’s biggest asset managers, says ESG “has not lost its purpose.”
“There are three different elements and you need to look at all three,” she said. “It’s about the long-term viability of the planet and the societies we live in” and ESG as an acronym “captures that.”
ESG was coined in 2004 by a United Nations team led by Paul Clements-Hunt, working with financial institutions. The big idea was that using ESG factors in financial analysis would help identify material risks, and opportunities to make money, from things like climate change. Doing so would also be compatible with fund managers’ fiduciary responsibilities.
Clements-Hunt, who is now a sustainability director at London law firm Mishcon de Reya, says the criticism of ESG comes from tensions created by the start of “a deeper shift in the global political economy.” After accusing the finance industry of using ESG as nothing more than a marketing gimmick, he urges caution on getting rid of the acronym altogether.
“ESG has become too deeply ingrained in the market system to be jettisoned easily for another three letter acronym,” he said. “We are at the very start of a massive adjustment, only just under way, as we steer a course toward regenerative capitalism. Whatever acronym we adopt the critical challenges will still be there.”
Oxford’s Eccles, who was also the founding chairman of the Sustainability Accounting Standards Board, defends the concept of ESG, even if he thinks the label has run its course.
Instead, he says he’s happy to talk about “material risk factors.”
“I know it’s a boring term, but it’s accurate,” he said. “We never have to say whether they’re an E, S or G issue. We can say we’re talking about carbon emissions or labor practices.”
In their report on the merits of ESG, analysts at McKinsey argue that while the acronym “may have lost some of its luster, its underlying proposition remains essential at the level of principle. Names will come and go...but we believe that the importance of the underlying ideas has not peaked.”
This article was provided by Bloomberg News.