The ESG Wave
Environmental, Social and Governance, coined ‘ESG’, has become integral to ensuring the health, competitiveness, and longevity of a company. It is no longer seen as an onerous regulatory requirement, but rather as a tool to attract investors and funding.
However, the increase of ESG and sustainable funds has drawn scrutiny from a chorus of critics targeting companies for misleading and unfounded claims, known as greenwashing. With Germany’s largest asset manager, DWS, being the most recent corporation to fall guilty to alleged selective or misleading assertions in their reporting, regulators have heightened their distinction between genuine reporting and hallow promises or lip service.
Despite the criticisms, the $4 trillion sector is still very much aligned to reach its goal of accelerating the world’s transition to a low-carbon, net-zero environment. In our most recent Green Room episode, we deep-dived into the E of ESG and how the sector has moved from the periphery to the center of global conversations. Our panel of ESG experts were:
- Kim Stroh, Co-Founder at Persefoni
- Ryan Merrill, Co-Founder at Handprint
- Danielle Harder, CEO at Scope 5
- Raphael Güller, Co-Founder at Sweep
Here’s what they had to say:
“The demand for managing environmental impacts has finally arrived”, Danielle Harder
Danielle Harder kicked off the conversation boldly, discussing the evolution of ESG around the world. In recent years, regulations have begun to pop up globally, all with different approaches but striving for the same harmonized set of standards. “One important change is the demand for managing environmental impacts has finally arrived. It’s still really voluntary in terms of the market, but there’s a growing awareness that everyone has a role to play.” Ryan Merrill adds, “The realization that stakeholders are awarding ESG leadership at the corporate level is growing very quickly, lagging just behind an even more considerable realization that shareholders are increasingly placing a premium on firms who are doing excellent work. That’s exciting”.
Referring to regional progress, Europe has been leading the charge with the Paris Agreement in 2015, and France being one of the first governments to mandate clear rules on how to track the E of ESG, as just a few examples. The US is quickly catching speed, with the most recent proposal from the US Securities and Exchange Commission (the “SEC”) regulating ESG disclosures for investment advisors and investment companies, as of May 2022.
Kim Stroh rounded up the regulation discussion by saying, “All these different regulations, such as the SEC and EU Taxonomy, are all driven to hold companies accountable, enable them to manage their carbon emissions or GHG emissions and reduce those overall”.
“Being transparent is the single most important thing”, Raphael Güller
A recurrent word that popped up throughout the discussion was the integrity of being transparent to ensure trust within the sector and waiver the prospect of greenwashing. Raphael Güller describes ESG as a ‘black box’ due to corporations needing to measure so many different things, which can be done in so many different ways. “Transparency will allow auditors to review reporting and stamp their vote of approval”, he says. Kim Stroh compares this to a company’s financial reporting. “We’ve seen ESG reporting move from a small little department into the office of the CFO, moving up into a place of equal footing to financial reporting and accounting”.
One hurdle to overcome, however, is the privacy vs transparency debate, as Raphael Güller notes. “To measure properly, you need to track everything. This creates tension between how companies can be transparent in what they emit and how they measure it, versus not disclosing too much internal business that may not want to be shared with competitors”.
“There’s a lot of bad publicity around greenwashing because there are opportunities to say so”, Kim Stroh
It’s no secret that ESG has been critiqued for greenwashing claims, with carbon credits being called a scam and ripe with false promises. Kim Stroh believes this is the case because there are opportunities to buy into projects or purchase carbon credits to perceive adherence to ESG. However, this isn’t the solution to helping contribute to decarbonizing businesses and their activities. “If a company is going to invest in offsetting carbon, then let’s make sure those dollars are being spent on projects that are verifiable and trusted”.
Surprisingly, Danielle Harder believes greenwashing is good for the sector, “While greenwashing is easy bait for journalist stories that get a lot of attention, I think it’s good and it has a function to help us make these markets better. We can’t get overwhelmed with greenwashing. We instead need to show a better path forward, which is making decisions based on data and showing the winners who are doing it right.”
“If we’re trying to make a change in the economy in time to not burn, we need all hands in the boardroom”, Ryan Merrill
As the discussion came to a close, some concluding insights from the panelists were greatly welcomed. Notably, Ryan Merrill translated the need from the top to impact a greener economy. “That’s the custom first; creating a paradigm that brings people together. There is a very important place for direct positive impact”. Raphael Güller completely agrees, believing the focus should be on empowering the whole organization. “We should move away from one person or one department worrying about this, to making ESG a daily business practice that impacts every single person”.
This is just a snippet of the piquant discussion that occurred, live on LinkedIn. You can watch the full Green Room episode on ESG here: