It has become increasingly apparent that executives are reluctant to use the acronym ESG.
The term was largely absent from discussions at the recent World Economic Forum (WEF) meeting in Davos, even if companies remain engaged in sustainability initiatives.
And it was recently revealed that powerhouse investment management firm BlackRock added ‘ESG matters’ to a list of two dozen risks it faces in a quarterly regulatory filing.
In fact, the term ‘ESG’ has been omitted from the annual letters of Larry Fink, the CEO of BlackRock, since 2023.
A year later, he announced he had stopped using it altogether.
Even as businesses continue to issue net zero pledges, many have stopped labelling their corporate decisions as ‘ESG’ – relief perhaps for companies that have faced continued backlash for leaning into the term while failing to make significant progress.
So, what does this mean for the future? Does the term ‘ESG’ itself need to be revisited? Has it become so broad and ambiguous that it now means everything and, therefore,nothing?
Alexandra Mihailescu Cichon believes a reframe of the term may be needed.
As Chief Commercial Officer at RepRisk, the world’s largest ESG technology company, Alexandra oversees the firm’s global commercial teams with a core focus on sustainability and ESG risk issues.
More than 80 of the world’s leading banks rely on RepRisk for their due diligence and risk management processes, while the world’s second-largest sovereign wealth fund has trusted RepRisk since 2009 to screen its portfolio for environmental and social risks.
“Within the area of ESG, we’ve witnessed politicisation and concerns of greenwashing – and as companies have come under fire for their ESG goals, green hushing has risen in prevalence,” she says.
RepRisk research from October 2023 indicates that one in every four climate-related ESG risk incidents was tied to greenwashing, an increase from one in five in its last report a year prior.
Little wonder, then, that some companies may need to take a step back.
“What they are undergoing is essentially a major change management exercise – embedding ESG across their governance, strategy, processes – and ensuring they can communicate transparently on measurable progress.”
And because the expectations have increased, and regulations are coming into play concurrently, some companies may need more time.
“2024 will be another big year for ESG, with updates to ISSB, GRI, and CSRD, despite its delay to 2026, plus national and local legislation being continually released,” explains Alexandra.
“While there may be a slight slowdown of the regulations around voluntary public disclosures, the regulations around greenwashing are continuing to advance. These are important for separating those that are doing meaningful work from those that are just talking the talk.”
Underlying Principles of ESG Remain
Alexandra argues that while the term ESG has been side-lined, it is important to remember that most stakeholders agree on the majority of its underlying principles – nature preservation, clean air and water, fair labour practices, to name a few.
“We must keep in mind that most ESG issues are non-political. While climate change, and perhaps DEI in the US, are an exception, most people agree on issues like nature preservation, good labour standards and clean water. ESG is about good business conduct and operational longevity – and good business conduct is not political.
“These transcend political affiliations,” she says.
She says concerns about greenwashing and the fear of litigation should “not hinder” investors and companies from establishing realistic goals, putting their plans on paper, and communicating measurable progress.
Should the Term ESG be Revisited or Reinvented?
“I think the term could be reassessed,” says Alexandra.
Rather than a rebrand, she suggests a disbanding of ‘ESG’ may be more appropriate.
After all, the term ‘ESG’ is still actively being used in many parts of the world, from Japan to the Middle East to Latin America.
Among merited criticism of ESG, Alexandra points to issues such as opaque ratings, methodologies, conflicts of interest, and the need for greater transparency from ESG rating providers.
“The need for stronger, better regulated ESG data persists – not only for investors to make more informed decisions, but the companies themselves to be more aware of their own risks and opportunities.”
She says that without additional data points, aggregated ESG ratings become questionable.
“Capital is not steered productively when companies can compensate for deforestation by having more diversity on their management team, thus compensating a poor score in one of the ESG pillars for a high score in another pillar.”
The upcoming EU regulation of ESG rating agencies aims to address some of these concerns, however – and this will hopefully lead to more clarity, consistency, and transparency, enabling investors to achieve their individual goals, says Alexandra.
Aggregated ratings based on company disclosures tend to conceal business conduct, which is one of the reasons why we are now seeing a gradual shift towards the disaggregation of ESG.
“Investors seek more granular data that is suited for their contexts and purpose. Regulations, in some cases, have become more targeted – covering human rights, biodiversity, climate change, and more.”
Ultimately, the issue is not the term itself but how it is applied, with aggregated ESG ratings often driving the conversation.
Alexandra believes the disaggregation of ESG will lead the industry to be able to utilise ESG data and information.
“A holistic and contextualised approach to ESG and business conduct risk management will continue to be critically important for investors and businesses to successfully navigate the current.”
Despite the recent criticisms of ESG, there continues to be demand for effective, strong ESG data from consumers, investors, businesses, and regulatory bodies.
“Ultimately, the principles of ESG are linked to a company’s operational excellence and its ability to be future proof in a changing world.
“As regulations become more refined, it will become easier for businesses, investors, and banks to realise how ESG data can mitigate risk and help generate better on-the-ground impacts.”
What is RepRisk?
RepRisk’s data empowers investors and companies globally to identify and assess the ESG risks they are exposed to by combining human and artificial intelligence. Utilizing an outside-in approach to data collection, we derive our data from public sources rather than relying on company self-disclosures. These insights support investors and companies in effectively managing and mitigating a spectrum of environmental, social, and governance-related risks, such as deforestation, human rights abuses, and corruption.
By Kate Birch
Source: sustainabilitymag.com
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