ESG Is Here To Stay
Despite the backlash in Republican circles in America, the majority of institutions are voting with their feet and sticking with the sustainability agenda, writes
Joe Biden recently used his only presidential veto to date in relation to a legislative battle over Environmental, Social and Governance (ESG). The veto was deployed after Republicans in the US Congress, allied with some Democrats, passed a Bill preventing pension funds investing on behalf of federal workers giving consideration to ESG factors before making those investments. Biden’s veto does not force investors to consider ESG factors but gives them an option to do so.
The veto should not come as a total surprise. The US is currently experiencing a backlash against the ESG agenda from many Republican politicians and some corporates, and the standoff has been brewing for a number of years, triggered by events in Texas.
In 2020, a number of independent oil producers in Texas were declined funding by JP Morgan, as the bank was reluctant to lend to potential future ‘stranded assets’. The oil producers lobbied politicians, and legislation emerged enabling Texas to boycott lenders ‘boycotting’ fossil fuel companies, taking aim at the likes of financial titan Blackrock. Copycat laws were passed in Florida, Kentucky, Louisiana, Utah and West Virginia.
More widely, a new informal national anti-ESG movement is taking on ‘woke capitalism’, extending the battleground to the social and governance pillars. ESG opponents charge that areas such as diversity and inclusion are thinly disguised items on the Democratic Party agenda, and that ESG is an extension of these political aims by the back door. In short, the anti-ESG movement is telling corporates to stay out of politics.
The backlash extended to the collapse of Silicon Valley Bank, with Attorneys General from 16 states complaining to US Treasury Secretary Janet Yellen and Federal Reserve chair Jerome Powell that the ‘woke bank’ went under due to excessive focus on ‘clean tech’.
So what does this mean for the future of ESG? Should business in Europe be concerned of disruption to the ESG agenda, or should they even pause their ESG journey to await the outcome of events in the US?
It would appear those opposing ESG in the US are in a minority. In March, polling by HSBC found that 60% of senior executives believe ESG will be mainstream in the next decade, with only 21% holding the opposite view.
This is a very substantial majority of opinion convinced of ESG’s future, and from highly influential players in the financial services arena where responses were gathered from 440 professionals representing $11.5 trillion in assets under management.
Almost half of respondents had signed or intended to sign onto the Principles for Responsible Investment (PRI), with about 60% having a written ESG framework in place that governs their investment activity.
University of Galway has introduced a new Masters in Sustainability Leadership, a two-year programme designed to address the challenges, risks, and opportunities that environmental sustainability presents for businesses and organisations. Pictured at the launch are (l-r) Prof. Alma McCarthy, Prof. Geraint Howells, minister Hildegarde Naughton, Prof. Ciarán Ó hÓgartaigh, and Dr Orla Lenihan
In Ireland, ill-defined climate risk is taken very seriously by the Central Bank. The regulator recently published its first climate-related financial disclosures of its investment assets, a document that seeks to allocate climate numbers to the CBI’s holdings of sovereign bonds.
The Eurosystem’s metrics are ‘Weighted Average Carbon Intensity’, ‘Total Carbon Emissions’ and ‘Carbon Footprint’. WACI measures the ‘carbon intensity’ of a sovereign bond by reference to tCO2e per €m revenue/ GDP. The carbon intensity of each country is computed “by normalising their GHG emissions by a measure of economic activity”.
The portfolio WACI is then calculated by weighting the carbon intensity of each issuer by their respective share of holdings in the portfolio. The idea is to come up with numbers that over time show a pattern. Though WACI may seem wacky, and to most lay people it is, this new metric will influence the investment holdings of banks and insurance companies in future years.
The financial services industry is pivotal to the rollout of ESG and climate-related action. Banks now offer better lending terms to borrowers based on Building Energy Rating, while investment firms are assessing future investments according to ESG criteria. These actions stimulate behavioural change in the corporate world by providing both carrot and stick.
AIB Group’s sustainability agenda is one of the most advanced of any corporate in Ireland. In its annual Sustainability Report, the bank references ambitious carbon reduction targets for c.€43bn of its customer loans, representing 75% of its lending portfolio. How this works in practice is that AIB’s property loans for buildings that are inefficient at containing heat are more expensive than for properties with better insulation qualities.
Over the next few years, corporates from outside of the financial services arena in Ireland will also come under enhanced regulatory pressure to develop their ESG and sustainability agendas and demonstrate progress. One of the change drivers will come from the new Corporate Sustainability and Reporting Directive (CSRD), which will impact over 50,000 larger companies across the Europe, over four times the number captured by the current rules of disclosure.
The CSRD will require companies to make disclosures using a detailed set of sustainability reporting standards, which the European Commission will adopt in final form by June 2024. Law firm Mason Hayes & Curran believes four out of ten organisations do not know if they fall under the scope of the directive, based on a recent poll of c.100 business leaders.
The firm’s informal research also found three out of four organisations do not currently report according to a sustainability standard or benchmark, with 45% not reporting on sustainability at all. Insufficient expertise is seen as the biggest barrier to sustainability reporting, followed by allocating sufficient resources and establishing governance frameworks (27%).
Over the next few years, there could be a US/Europe divide on how much attention should be paid to ESG, particularly if the Republican party wins the 2024 presidential election. For the moment though, the majority of US institutions are voting with their feet and sticking to the ESG agenda.
Where the investors go, corporates will inevitably follow. Further disruption of the ESG agenda in the US is probable but is less likely to derail its overall trajectory.
‘Three out of four organisations do not report according to a sustainability standard’