Sasja Beslik examines the progress of ESG over the past five years, highlighting the power of ESG in driving transparency and accountability to drive positive change.
Over the past half-decade since ESG emerged as a concept, it has evolved through various guises. Initially known as socially responsible investment or responsible investments, it has more latterly (inaccurately) been referred to as ‘sustainable investing’.
ESG has managed to take a central role, not as the core actor in the theatre of capitalism, but at least as a member of the crew. It positioned itself between regulators and companies, addressing issues that were previously overlooked in the market, especially in terms of environmental damage, pollution, climate, social issues, diversity and inclusion.
Moving the needle on transparency
During its early days, ESG’s involvement was voluntary, with both companies and financial markets trying to define corporate responsibilities. This voluntary approach, in a sense, left regulators in the dark as the slow-moving processes hindered immediate action. However, this led to a tangible push for transparency, especially in the initial stages.
The role and influence of EU regulation
The European Union has played a significant role in shaping ESG regulations and sustainability initiatives, particularly concerning climate issues. Through disclosure requirements, the EU has pushed both the financial industry and companies to be transparent about their risks related to their products, sourcing, and overall business operations. This approach has avoided imposing strict rules on companies but encourages them to be more accountable for their actions and impacts.
New regulation looks set to have a wider impact. The EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD) would require in-scope companies to conduct due diligence on, and take responsibility for, human rights abuses and environmental harm throughout their global value chains. Companies in-scope include both large EU and non-EU businesses with significant net turnover within the EU. Global businesses operating and selling their products and services in Europe will need to comply.
ESG is not changing the regulation of what companies need to be held accountable for, but it is changing the transparency level. In turn, that is changing the way that companies can be judged by investors and other stakeholders regarding the level of responsibility they take.
Shining a light on social issues
An increased focus on transparency has highlighted social issues, such as working conditions and living wages for workers, particularly in Southeast Asia and Africa. While some progress has been made, it is essential to evaluate whether conditions have significantly improved for those affected over the last five to six years. By shedding light on these issues, ESG has underscored the need for both investors and companies to address the areas in need of improvement.
Shifting business’ values
ESG has succeeded in shifting the perception of business values. In the past, the idea that businesses should prioritize societal values seemed like an unrealistic proposition. However, ESG’s influence has made companies recognize the moral aspect of their operations. They are not just profit-maximizing entities but consist of people and clients, and hence, they must align their values with societal expectations.
While this shift is essential, it has not yet resulted in transformative outcomes. Emissions continue to rise, and urgent action is required to drive meaningful change in business models.
Challenges and the rise of climate litigation
Despite the progress made by ESG, challenges persist, particularly in the realm of climate change. There is a growing urgency felt by many individuals worldwide, yet politicians and business leaders often remain silent. There are serious concerns about the commitment to addressing climate change and the underlying economic structures that hinder transformative change. Certain political factions, particularly in the US, are pushing to roll back environmental regulations to support businesses.
Some net-zero targets, especially those communicated by banks, may not be reached, indicating the need for more significant efforts in decoupling growth from fossil fuel reliance.
The Paris Climate Agreement, while not legally binding, has sparked significant litigation globally with many outcomes favouring pro-climate proposals. Climate litigation is expected to take centre stage as a powerful tool to hold companies accountable for their actions and environmental impact.
Harnessing ESG’s true power
The true power of ESG lies in its ability to drive transparency, accountability, and positive change in the business world. Although ESG has made strides, it remains a collaborative effort that requires collective action. As individuals, we have the power to shape a brighter and more sustainable future for our planet and future generations. Our choices matter, and within the free market system, we can push capital flows towards initiatives that create tangible results and a real sustainable transition.
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