ESG Faces Political Headwinds

Summary

The 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

00:00

🌿 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.

05:02

📉 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.

Keywords

💡ESG

ESG stands for Environmental, Social, and Governance, which are three central factors in measuring the sustainability and ethical impact of a company. In the video, ESG is discussed as a next generation of corporate responsibility, emphasizing the need for companies to be transparent about their impact on the environment, society, and governance practices. The conversation highlights the shift in focus towards climate change and the real acceptance by corporations and governments of its reality, as well as the challenges in implementing ESG principles effectively.

💡Financial Crisis and Great Recession

The Financial Crisis and the Great Recession refer to the severe economic downturn that began in 2007-2008, which had global repercussions. In the context of the video, these events are mentioned as the genesis of ESG, as they led to a call for greater corporate transparency and responsibility. The crisis highlighted the need for companies to reassess their value propositions to various stakeholders, including shareholders, communities, employees, and customers.

💡Climate Change

Climate change is the long-term alteration of temperature and typical weather patterns in a place. It is primarily attributed to human activities, especially the emission of greenhouse gases like carbon dioxide, which trap heat in the Earth's atmosphere. In the video, climate change is a central theme, with the scientific community's compelling evidence being acknowledged by most global corporations, local corporations, and governments. The discussion revolves around the need to address climate change and the various approaches to doing so, including corporate commitments to decarbonization and net zero targets.

💡Decarbonization

Decarbonization refers to the process of reducing or eliminating the emission of carbon dioxide and other greenhouse gases from a company's or a country's activities. In the video, it is mentioned that most top companies in the U.S., including fossil fuel companies, have made commitments to decarbonize their operations as part of their efforts to address climate change. This involves transitioning to cleaner energy sources, improving energy efficiency, and exploring carbon capture and storage technologies.

💡Net Zero

Net zero refers to achieving a balance between emitting greenhouse gases and removing an equivalent amount of gases from the atmosphere, resulting in no increase in overall greenhouse gas concentrations. Companies aim for net zero by implementing strategies to reduce their carbon emissions and offset any remaining emissions through activities like carbon credits or afforestation. In the video, the commitment of companies to net zero is highlighted as evidence of their efforts to combat climate change.

💡ESG Funds

ESG Funds are investment funds that consider environmental, social, and governance factors alongside financial factors when selecting their portfolio. The video discusses the distinction between ESG as a measure of a company's behavior and ESG funds as a financial product. It is noted that most ESG funds, or 'light green funds,' use ESG scores to pick stocks, but they may not be significantly different from other comparable funds in terms of performance.

💡Carbon Tax

A carbon tax is a fee imposed on the burning of carbon-based fuels (coal, natural gas, oil, etc.), calculated on the carbon content of the fuel. It aims to reduce greenhouse gas emissions by making carbon-intensive activities more expensive and encouraging the shift towards cleaner energy sources. In the video, a carbon tax is suggested as a tool that could help companies meet their climate commitments by incorporating the environmental cost into the price of goods and services, thus influencing consumer and producer decisions.

💡Carbon Credits

Carbon credits are permits issued by a government or an international body that allow the holder to emit, or produce, a certain amount of carbon dioxide. Companies can buy carbon credits to offset their emissions, compensating for their carbon footprint by investing in environmental projects that reduce emissions elsewhere. The video mentions that the implementation of carbon credits has been slow due to resistance from the NGO community and concerns about their effectiveness in driving genuine emission reductions.

💡Blended Finance

Blended finance is a funding mechanism that combines capital from public or philanthropic sources with private sector investment to finance projects in sectors or regions where it is not yet financially viable to attract private investment alone. In the video, blended finance is discussed as a tool that was expected to help address climate change by bringing together companies, governments, and multilateral development banks. However, the changes needed for blended finance to be effective have been slow, indicating a challenge in mobilizing the necessary resources for climate action.

💡Voluntary Commitments

Voluntary commitments refer to pledges made by companies, organizations, or governments to achieve specific environmental or social goals without any legal obligation or regulatory requirement. The video highlights that while many companies have made voluntary commitments to address climate change, there is a concern that these commitments may not be enough to drive the fundamental changes needed and could potentially mask the need for more structured and regulated approaches to emission reduction.

💡Clean Energy

Clean energy refers to energy sources and technologies that have minimal impact on the environment, producing little to no greenhouse gas emissions. Examples include wind, solar, and hydroelectric power. The video discusses the development of clean energy as a critical part of companies' efforts to decarbonize and meet their climate commitments. It also touches on the Inflation Reduction Act and infrastructure incentives that aim to accelerate the adoption of clean energy technologies.

💡Net Zero by 2050

The goal of net zero by 2050 is a widely accepted target for countries and companies to achieve a balance between emitting greenhouse gases and removing them from the atmosphere by the middle of the 21st century. This target is aimed at limiting global warming to well below 2 degrees Celsius above pre-industrial levels, with an ambition to limit the increase to 1.5 degrees Celsius. The video discusses the feasibility of achieving this target, given the current pace of progress and the need for more fundamental changes in energy production and consumption.

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.