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.