The Trialogue of ESG: War of the Words

By James Vaccaro, Executive Director of the Climate Safe Lending Network

This blog is from the transcript of a video we share in our monthly newsletter - watch the video here!

What in the world is happening with ESG? Let’s talk about the war of the words, this trial, this three way conversation on ESG amongst its proponents and the criticism it's getting from multiple sides.

Let's first off start with a definition. When you look at the environment and society and factors of what's happening in the world, you can look at it through two different lenses from a financial institution perspective.

One is the single materiality, the financial risks and opportunities. In other words, to what extent does what's happening in the environment and society impact the bottom line of a company?

The other is double materiality, the environmental impact. In other words, what is it that company is doing for the world, for the environment and for society?

Looking at all the positive benefits, all the negative impact an investment may have, leads to multiple strategies and worldviews about what you can do in the field of ESG investment.

In the middle of the two, they say the profit lens is equal to the purpose lens that companies’ ESG impacts on the world, whether they're negative or positive they are going to fully be reflected in those financial risks and benefits. You might say when looking at what a company does, if it's causing harm, that's going to come back on it.

And that's in a way classically the ESG narrative. In the middle some say ‘ESG is a win-win, it's green growth - you're doing well by doing good’.

The Debate

Ultimately all those impacts are going to result in financial consequences. However, if you look at ESG from a purely purpose lens and there are companies in the universe which are actually benefiting from ESG factors, whether or not those companies are creating positive impacts for the world, then there's a critique that says, ‘this is just greenwashing. This is part of a greenwashing agenda. It's distracting from the real changes we need to make in the world, because whilst those companies are profiting and being successful, they're not generating positive impacts necessarily and making the world a better place.’

Likewise, if you look at ESG through a purely profit lens, you look at some of the impact investors and there's a critique that says, ‘that's all part of a distracting agenda from the financial needs we have right now, the prime aim of financial products is to just make money.’

So all of these critiques on ESG are coming from all sides. And all of the different parties are getting tons of data - there's a whole sea of data which is being amassed. Like the psychologist Jonathan Haight says, we may choose our worldviews emotionally - so each side is selecting the data which best backs up their preferred worldviews. If someone wants to say that ESG creates outperformance, they will find the data for that. If someone wants to say it creates underperformance, they will find the data for that. Everyone says, ‘look at my data, it proves me right!’

What should we be asking?

So what are the salient questions for a bank, for financial institutions?

Firstly, what are you really trying to achieve?

What is it your clients really want? Are they aware of the distinctions and the choices that they're making? When they're selecting a particular strategy, what are the capabilities needed to be effective for your chosen strategy?

What are the questions you need to ask of data? And what order are you going to do that in?

That's not the whole extent of the complexities involved in selecting strategies which are going to be positive for the environment or climate, but it's a starting point and hopefully a way of making sense of all the critiques.