ESG

ESG: From Rhetoric to Reality

Written by John Bree

While ESG (Environmental, Social & Governance) has gained popularity in recent years, in the United States the values behind the movement date back to the founding of the country. The importance of governance was recognized as critical on December 15, 1791, when the US Bill of Rights was ratified:

“While the Governance component is somewhat more difficult to define, and quantify, the vast majority of people believe in freedom of religion, speech, press, right to due process of law, freedom from self-incrimination, double jeopardy, excessive bail, and cruel and unusual punishment.”

Fast forward to the 20th century, when Greenpeace was formed in 1971, its mission stated “Our goal is to ensure the ability of the earth to nurture life in all its diversity. That means we want to protect biodiversity in all its forms and prevent pollution and abuse of the earth’s ocean, land, air, and fresh water.” Around the same time, powerful words about social governance were included in the Equal Rights Amendment in 1972, even though the amendment was never ratified: “Moving to the Social Sector of the heightened awareness, no reasonable person would disagree with a commitment to guarantee equal legal rights for all people regardless of sex and end legal distinctions between men and women in matters of divorce, property, employment, and other matters.”

While the importance and long-term impact on the earth and all its inhabitants from our actions must never be marginalized, I fear that without a very realistic and practical approach, society will quickly tire of ESG rhetoric, and trying to achieve the unattainable demands and failed commitments of companies, cities, and countries will stagnate progress. It doesn’t matter whether one is “woke, awake, or environmentally asleep,” businesses cannot avoid the heightened awareness by their customers of sustainability efforts. Companies that implement an ESG framework that provides a deeper, more local, and forward-looking view of their supply chains and suppliers will see gains in their brand reputations.

Of course, it is important to set long-term goals and objectives, which is the foundation of all successful entities and jurisdictions. Without a commitment to continuous awareness of the changing landscape, often the result of a combination of avoidable and unavoidable challenges, the best plans will be derailed and left to flounder. A fast-evolving priority for governments and regulators has been ESG. One of the primary challenges in developing and implementing an ESG program is differentiating between what your company will do and how those requirements translate to your suppliers, often operating in locations with very different, cultural, economic, and social mores.

Looking ahead, will increased financial industry regulatory guidance require banks to reduce lending to companies and governments in emerging markets with less robust environmental and social justice programs? Will efforts to improve an ESG profile be canceled or delayed with reduced capital? Consider what Monsur Hussain, a financial institutions researcher at Fitch said in a January 2020 Wall Street Journal article by Kristin Broughton:

“We find that ESG screening leads to greater due diligence. Banks rarely decline to lend based on ESG factors alone. On the rare occasions when borrowers are denied financing based on ESG risk factors, they often have other financing options available at a similar price.”

When banks in Australia scaled back on lending to new thermal coal projects and coal-fired power plants following the 2015 Paris climate accord, for instance, Chinese banks, in response, increased lending to the sector, according to the Fitch report referred to in the article.

Beyond lending and credit, the enhanced focus on ESG will also likely have an increased impact on the investment industry. An alert from White & Case on June 13, 2022, stated: On May 25, 2022, the US Securities and Exchange Commission (the “SEC”) proposed two form and rule amendments seeking to enhance and standardize disclosures related to environmental, social and governance (“ESG”) factors considered by funds and advisers, and also to expand the regulation of the naming of funds with an ESG focus. These proposed rules follow the landmark SEC proposal announced on March 21, 2022, requiring public companies to disclose extensive climate-related information in their SEC filings.

Considering what seems to be constantly changing regulations, we must tread carefully. Adopting ESG-related values requires an honest and candid assessment of what may happen if a comprehensive, well-thought-out, program is not implemented. While the reports we’re hearing about regarding “overzealous implementation of ESG programs” in countries like Sri Lanka and The Netherlands may seem daunting, it’s important to remember that the optics do not always match what is really occurring beneath the surface. At the same time, there are many stories about companies that are successfully integrating ESG-related values into their workstreams.

Positive or negative, all these stories reflect the critical importance of paying close attention to the changing landscape and conditions in a jurisdiction. True global sustainability will be accomplished through an ongoing journey of small, planned, and agile actions that consider the needs of the community and the potential downside of poorly devised plans.

One of the most critical areas for companies to address as they prepare to deal with the rapidly changing ESG landscape is current, validated, and easy to consume and action reliable ESG Risk Intelligence. Much of the available data is very limited and focused on only one of the ESG factors. A comprehensive, full-spectrum approach to ESG Risk Intelligence is the foundational component of a successful program.

To be successful, companies need a proactive ESG solution to effectively gain the benefits of leading ESG practices while avoiding business disruptions and reputation risks. At Supply Wisdom, our ESG solution provides:

    • Comprehensive coverage across enterprise, third-party & location factors
    • A framework based on widely accepted and current ESG standards
    • Continuous “always-on” monitoring and real-time ESG intelligence
    • Anytime assessment capability with always-current ESG intelligence

If you are interested in learning more about adopting a leading ESG framework, continuously monitoring a country’s ESG regulations and guidance, and demonstrating corporate social responsibility, contact Supply Wisdom today.