There seems to be a fair chance that we have now passed ‘peak ESG’ raising four questions:
- What will replace it?
- Which aspects of the ‘ESG’ concept will transfer and which will die?
- What does this mean for companies’ sustainability communications to investors?
- Will the ‘never-ESGers’ ever stop being unutterably smug? Answer: No.
What will replace ‘ESG’?
Although the number of explicitly-defined strategies are few and the process of change will be messy, I suspect that investors will gradually coalesce around a concept of ‘sustainable transition investing’ which aligns with a broad societal objective to encourage a flow of capital from unsustainable economic activities towards more sustainable ones.
Which aspects of the ‘ESG’ concept will die and which will transfer
Without gazing too deeply into the crystal ball, I don’t fancy the survival chances of:
- Comparable data … because it simply isn’t possible and doesn’t work in an investment context
- Weighted ratings … because how / why would you add (or multiply) employee satisfaction by carbon emissions?
- The broad concept of ‘company sustainability performance’ – see below
By contrast, I see a good likelihood that:
- A new ‘E’ will be added – as the economic role of companies is recognized as distinct from their identifiable stakeholder-focused ‘S’ roles
- Materiality (in two distinct forms: financial-materiality and impact-materiality) will both become central to the focus of company ó investor communication
- “Company sustainability performance” will be replaced by four connected factors “Sustainability context”, “Company exposure”, “Management strategy” and “Executed response”. (In simpler terms, a relationship needs to be established between the specific exposure(s) that a company faces and the way that it responds)
- A focus on ‘context’ and ‘transition’ will resolve the tension that investors and companies currently face between wanting forward-looking information and the fact that data can only be trusted when it comes from the past.
What does this mean for companies?
The dawning recognition that comparable data and consolidated ratings are not helpful for investment decision-making presents an opportunity for companies to put forward things that are useful – notably a sustainable equity story – a coherent set of messages that aligns a company’s investment case with the sustainability related transitions that it faces.
To present this broader picture, companies will need to:
- Communicate to investors and analysts directly
- Learn to discuss both the (sustainable) industrial / market context within which they operate as well as their specific practice and peformance
- Recognise that ‘ESG’ data needs to be the servant of their equity story not its master
- Adopt ‘mainstream’ investor comms practices to improve the efficiency and effectiveness of sustainable investor communications – involving investor targeting, prioritization, direct communications, a disciplined timetable etc.
While this may sound like a big change in sustainable investor communications, it isn’t really. It’s nothing more than starting to treat sustainability issues like all other ‘mainstream’ issues that companies communicate on with investors.
This alignment between sustainability and mainstream practice brings efficiency and is a necessary pre-condition to capital flows from unsustainable to sustainable activity … which both sound like opportunities worth seizing …
I look forward to your thoughts via here (on SRI-Connect) or via here (on LinkedIn)
Appendix note: ‘Past peak ESG’: Really?
I appreciate that my ‘past peak ESG’ premise may be controversial. So, although I didn’t want the article to be about this prediction - I feel that I should explain my rationale which in bullets is that the ‘strengths’ of the ‘ESG’ concept on the way up have now become its weaknesses on the way down:
- A strength on the way up: ‘ESG’ couldn’t be easily defined. This facilitated adoption by cautious investors who were free to define the concept in ways that suited them … and hence adopt it.
- ... becomes a weakness on the way down: Anyone (including opponents) can now define ‘ESG’ in ways that suit them (e.g. as synonymous with woke-ism’) and hence attack it.
- A strength on the way up: A commitment to ‘ESG risk management’ is a softer option than a commitment to sustainable development. This enabled cautious investors to adopt it.
- ... becomes a weakness on the way down: A commitment to ‘ESG risk management’ is a softer option than a commitment to sustainable development - which to those in a world that want to allocate capital towards solving sustainability challenges - looks like ‘greenwashing’. Cautious investors are now likely to consider the risks of being caught as a ‘greenwasher’ as more significant than the risks of being seen as sustainability-aligned (in some jurisdictions).
I recognize that these are ‘broad-brush’ expectations. They are not predictions. They do not have a timetable. They are only intended to indicate a direction of travel and are presented as a rough context for what might happen next in sustainable investment … in order to support companies that have annual reporting timescales that are longer than the daily political news-cycles that seem likely to support and buffet ‘ESG’ over the coming months.
As ever, I'm keen to hear other (esp. opposing) views: Via SRI-Connect here or via LinkedIn here
