ESG Faces Political Headwinds
Summary
TLDRThe transcript discusses the current state of ESG (Environmental, Social, and Governance), highlighting that despite some reduction in enthusiasm, there is still a strong commitment to addressing climate change. It emphasizes the distinction between ESG as a measure of corporate behavior and ESG funds as a financial instrument. The conversation points out the challenges in achieving climate commitments due to slow adoption of tools like blended finance and carbon credits. It also underscores the importance of governmental actions, such as a carbon tax, to drive meaningful change and avoid unstructured voluntary commitments masking the need for fundamental shifts.
Takeaways
- 📉 ESG (Environmental, Social, and Governance) is facing skepticism and a potential reduction in enthusiasm.
- 🌿 The origin of ESG stems from the post-financial crisis era, aiming to clarify corporations' responsibilities towards various stakeholders.
- 🔄 ESG has evolved to largely encompass the acknowledgment of climate change and the need for corporate action.
- 🌍 There's a global consensus among corporations and governments on the reality of climate change and the necessity to address it.
- 🏢 ESG funds are distinct from corporate behavior in ESG, often reflecting how companies are affected by climate change rather than their actions.
- 💼 Many ESG funds are 'light green', using ESG scores for stock selection without significant differences from other fund types.
- 📈 Top U.S. companies, including fossil fuel firms, have made commitments to decarbonization and net-zero targets.
- 🌬️ Despite commitments, tools like blended finance, carbon credits, and offsets have been slow to materialize or face resistance.
- 💡 Professor Andy King suggests that a carbon tax or tradable carbon permits could help companies meet climate commitments more effectively.
- 🚫 Unstructured voluntary commitments without proper regulation might mask the need for more profound systemic changes.
- 🌍 Global progress in reducing carbon emissions is mixed, with the U.S., EU, and China showing different levels of advancement and challenges.
Q & A
What is the origin of ESG and why was it developed?
-The origin of ESG (Environmental, Social, and Governance) is post-financial crisis and the Great Recession. It was developed as a next generation of corporate responsibility in response to the need for corporations to be clearer about their value proposition to various stakeholders, including shareholders, communities, employees, and customers.
What does the 'E' in ESG primarily stand for?
-The 'E' in ESG primarily stands for the environment, and it largely signifies a universal acceptance that climate change is real. It reflects the commitment of corporations and governments to address climate change.
What is the difference between ESG as a behavior of a company and ESG funds?
-ESG as a behavior of a company refers to how the company operates with regard to environmental, social, and governance factors. In contrast, ESG funds are investment funds that use ESG scores to select stocks for their portfolio. The performance of these funds is assessed separately from the ESG behavior of the companies they invest in.
What type of ESG funds are most prevalent in the market?
-Most prevalent in the market are 'light green' ESG funds, which use ESG scores to pick stocks and include them in their portfolio, not significantly differing from other comparable types of funds.
What are some of the risks that ESG fund managers should consider?
-ESG fund managers should consider the risks associated with climate change and how it affects their investments. They should also focus on how their firm can contribute to public assets and promote sustainable practices.
What is the current state of voluntary commitments made by companies to address climate change?
-The majority of top companies in the U.S., including those in fossil fuels, have made commitments to decarbonize and achieve net zero emissions. However, the tools they thought they would have, such as blended finance, carbon credits, and carbon offsets, have been slow to materialize or are not as effective as anticipated.
What impact has the lack of certain tools like blended finance and carbon credits had on companies' climate commitments?
-The slow development or absence of tools like blended finance and carbon credits has meant that companies' climate commitments might not be as impactful as expected. It has also highlighted the need for more fundamental changes and government actions, such as a carbon tax or tradable carbon permits.
What are the environmental progress and commitments of China?
-China has been making significant progress in green technologies, including batteries, rare minerals, wind, and solar, dominating the solar panel market. However, they continue to build coal plants at a remarkable pace. China has committed to reducing their carbon footprint after 2030.
How has the United States progressed in terms of reducing carbon emissions?
-The United States has made real progress since 2005-2007, with hopes of reducing carbon emissions to about half of what they were in the early 2000s by 2030. The Inflation Reduction Act and infrastructure incentives are expected to further promote sustainable practices.
What is the potential impact of unstructured and unregulated voluntary commitments on the need for fundamental change?
-Unstructured and unregulated voluntary commitments might mask the need for more fundamental change. They could lead to a false sense of progress without addressing the root causes of climate change, similar to what happened in the chemical industry after the Bhopal accident.
What are the concerns regarding the use of a carbon tax to help companies meet their climate commitments?
-A carbon tax is seen as beneficial because it incorporates the environmental impact into the price of goods and services, allowing for better decision-making. However, there are concerns that without proper governmental action, such as implementing a carbon tax, voluntary commitments may not lead to sufficient change.
Outlines
🌿 The Evolution and Misconceptions of ESG
This paragraph discusses the origins and current state of Environmental, Social, and Governance (ESG) principles in the corporate world. It highlights the genesis of ESG following the financial crisis and the Great Recession, emphasizing the need for corporations to clarify their value proposition to various stakeholders. The speaker addresses the confusion around ESG, particularly the distinction between a company's ESG behavior and its impact by climate change. The paragraph also touches on the concept of 'light green' ESG funds, which use ESG scores for stock selection, and the challenges in achieving higher returns through ESG investments. It acknowledges the widespread commitment to decarbonization among top companies, including those in the fossil fuel industry, and the real-world impacts of climate change. The paragraph concludes by discussing the limitations of voluntary commitments and the potential benefits of tools like blended finance and carbon credits, which have been slow to materialize.
📉 Governmental Policies and the Role of Voluntary Commitments
This paragraph explores the role of governmental policies such as carbon taxes and tradeable permits in driving better environmental decisions and outcomes. It contrasts these with the current voluntary commitments made by companies, which may not lead to fundamental changes. The speaker expresses concern that unregulated commitments could mask the need for more significant reforms. The paragraph also discusses the historical effectiveness of governmental regulations, such as the Clean Water Act, and the potential for a carbon tax to encourage a shift away from carbon-intensive fuels. The discussion extends to the progress made by different regions in terms of environmental commitments and actions, particularly the European Union, the United States, and China. It acknowledges the mixed progress and the potential for both falling short and exceeding the 1.5 degrees cap on global warming, with a focus on the long-term goal of net zero emissions by 2050 and the impact of recent legislation like the Inflation Reduction Act.
Mindmap
Keywords
💡ESG
💡Financial Crisis and Great Recession
💡Climate Change
💡Decarbonization
💡Net Zero
💡ESG Funds
💡Carbon Tax
💡Carbon Credits
💡Blended Finance
💡Voluntary Commitments
💡Clean Energy
💡Net Zero by 2050
Highlights
ESG's origin post-financial crisis and the Great Recession, aiming for corporate clarity on value propositions.
ESG as the next generation of corporate responsibility, with widespread acceptance of climate change as a critical component.
Confusion around ESG, its implementation, and the distinction between ESG as a behavior and ESG funds.
The majority of global corporations, including fossil fuel companies, have made commitments to decarbonize and achieve net zero targets.
The challenges faced by companies in utilizing tools like blended finance, carbon credits, and offsets due to slow adoption and resistance.
The potential of a carbon tax or tradeable permits to drive better decision-making and help companies meet climate commitments.
The concern that voluntary commitments without structured regulation may mask the need for more fundamental change.
The progress made by the United States in reducing carbon emissions since 2005, with a goal to be at half by 2030.
China's dual approach in leading the market in green technologies while still expanding coal plants, with a commitment to reduce carbon footprint post 2030.
The potential impact of the Inflation Reduction Act and infrastructure incentives on accelerating the development and adoption of clean energy sources.
The importance of governmental action, such as the Clean Water Act and carbon tradeable permit systems, in driving environmental improvements.
The discussion on the feasibility of achieving net-zero emissions by 2050, with considerations of potential delays.
The acknowledgment of the hottest year in recorded history in 2023, highlighting the urgency of addressing climate change.
The impact of climate change on various aspects of life, including extreme weather, water and food shortages, and the rise of climate-related diseases.
The role of academic research and practical experience in understanding the potential substitution of ESG for political activity.
Transcripts
If you just read the front pages of the newspaper, you'd think ESG is almost
dead because some people are running away from it.
Where are we right now? Is there a reduction in enthusiasm or
commitment? I think there's some confusion around
it. Let's just sort of go back here for a
minute. The real genesis of ESG was
post-financial crisis and the Great Recession, when there was certainly
ample reason for the world to wish that corporations were a little clearer on
their value proposition, to their shareholders, to their communities, to
their employees, to their customers, etc..
So ESG is kind of a sort of next generation of corporate responsibility.
And everybody had some version of corporate responsibility in their
frameworks. So what we're really talking about that
changed is the E and the E is is largely a part of, I think, a pretty universal
acceptance that climate change is real.
The scientific community has been very compelling.
Most of global corporations, local corporations and most governments in the
world agree we need to address climate change.
Now, how we do it, the pace we do it. And
that's that's become somewhat politicized.
And then the other thing is, is so there is the ESG, how you behave.
And then there is the ESG funds. Well, the ESG funds are a whole other
thing. ESG funds mean a fund in how it
performs. And it's like any other fund.
That distinction and Finucane makes between ESG tied to how a particular
company behaves. And ESG simply reflecting how a company
is affected by climate change, regardless of what it does, is an
important one that is often confused, according to Professor Andy King of
Boston University. Most ESG funds are what I call light
green funds, which they're using ESG scores to pick stocks and put them in
their portfolio. And most of them are not very different
from other comparable types of funds. If I think about what a manager might do
with ESG funds that I think is very valuable and you can be looking at what
you're doing in terms of the risks that you face and you could be making good
invest investments on how to change your firm at the public assets level.
I think the effect is much more minor and it's very difficult to have a higher
return. And as we said, it's very difficult to
have any impact with that at this point is the problem is not a lack of
voluntary commitments on the part of companies trying to address climate
change. The top ten companies in the U.S.,
whether you're looking at revenue, market cap,
net income, however you want to define it, most of those companies have made
commitments to decarbonizing their companies, demonstrating their
decarbonization. Most are committed to net zero.
Their sort of end dates may be a little different in their descriptions may be a
little different, but the top companies are there.
Even the fossil fuel companies, which I know is more controversial, are making
commitments and other focuses more on carbon capture and sequestration
storage, and less about forms of clean energy.
But, you know, I defy you to mention a company that hasn't put something
forward in this effort. And, you know, 2023 was the hottest year
in history of recorded history. I don't think there's much argument that
we're looking at extreme weather, water shortages, food shortages, a rise in
certain climate related diseases like asthma.
So I don't think there's an argument about the science.
I think most companies are committed, but some of the tools they thought they
were going to have have been held back a little bit.
And what I mean by that is everyone talked about blended finance.
So that meant that companies and governments and multilateral development
banks would work together. So that would mean multilateral
development banks would actually have to change considerably.
Those changes are slow. Some
companies thought that they would have carbon credits or carbon offsets.
And, you know, I'm focused on that in my own work.
Well, those have been slow to come because the NGO community has really
resisted them and really is sort of problematic because there's plenty of
proof that it's those companies that are doing the most in just using carbon
credits as the delta to close the gap that are that are making the most
progress. So some of the tools companies thought
they would have are no longer either they're not there or they're slow
coming. One of the tools Professor King says
could help companies meet their climate commitments would be something adopted
by the European Union two years ago. A carbon tax would help.
The great thing about things like that is that then the information is carried
in the price and so people are able to make much better decisions.
Or carbon tradeable permits or something like that would be wonderful as well.
Absent governmental action such as a carbon tax.
He worries that unstructured and unregulated voluntary commitments to
limit emissions may mask the need for more fundamental change.
That is a big fear of mine, and we've seen that before in other areas.
After the famous Bhopal accident, which killed so many people in India, the
chemical industry tried to self regulate and it didn't really work.
I have to say as an academic, the research suggesting that ESG is
substituting for political activity is not very strong.
But it is my experience that says I think that could be happening.
I'm looking out the window at the Charles River and it is clean because of
the Clean Water Act that was passed in the seventies, actually under a
Republican president. And it's a marvelous thing.
I'm breathing better air because we had a carbon trade table permit system for
assault from coal burning. And that's a marvelous thing.
And if we had a carbon tax, people would be moving away from a carbon intensive
kind of fuels and things that they're doing.
So all three work well. You've got to do one.
So have we made progress? Let's take the EU and the environment.
Have we seen actual results in terms of carbon emissions going on?
Because I've seen conflicting reports about that, exactly how it's worked.
Thus far it's been mainly voluntary, if I'm not mistaken.
Have we made progress in the real world? Yeah, we have made progress.
Well, it's voluntary in the US, voluntary in Europe, and it is sort of
double sided in China. So let's just go out to end fathers.
China is making enormous progress in green technologies, batteries, rare
minerals, wind, solar, etc..
I mean, they they own the market in terms of solar paneling, but they also,
you know, erect coal plants at a pace that is just remarkable as well.
So they are a tale of two cities. And their commitment is that they will
start to reduce their carbon footprint after 2030, whereas the rest of the
world is really making real progress. The United States has made real progress
since 2005, 2007, and by 2030 they hope to be about half of what they were in
their early 2000. And we seem to be on pace for that.
This is a journey we're talking about the end of this century.
We're talking about net zero by 2050. Could we miss that by both temperatures
this 1.5 degrees cap? I think so.
Could we be post 2050?
Maybe. But I also think that there's a real
commitment in terms of developing new sources of clean energy, wind, solar,
battery, etc.. Maybe not as fast as everybody wants,
but with the I.R.A., the Inflation Reduction Act and the infrastructure,
these are incentives that I think when they're ironed out, there's still
complications with them. When they're ironed out, they are
incentives to do more, more broadly and more quickly.
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