Vice President Client Development at Entelligent. Dr. Khosla is an economist, econometrician, and mathematician who has deep knowledge to build investing solutions. She has extensive experience in predictive modeling, microfinance and designing impact investment tools. Khosla has been working on impact solutions since 2003 both nationally and internationally. Khosla has been working with Entelligent since 2016 developing Entelligent’s data science team, Smart Climate technology, Smart Climate Indices as well as additional climate risk related products. She is one of the inventors of patented Smart Climate technology. Khosla has several publications in economics, impact investing and microfinance. Besides designing sustainability products Khosla has an active teaching career training student in economic applications and data science. Khosla holds a Ph.D in economics, and master degrees/diploma in three disciplines including economics, statistics and public relations.
In this article, I reflect on my decades-long journey with ESG. I conclude that there is more consensus than we might think and that where there are differences, we should embrace them.
My journey with ESG
In many ways, ESG sits at the heart of my lifelong intellectual journey. My earliest academic work was in developmental economics, which advocates an approach in which we seek win-wins: programs that do well in economic terms by doing good in social and governance terms.
Different perspectives on ESG
Over the decades, ESG has grown and evolved – and so has my work. As a solution provider in the ESG space, I am amazed to see how ESG is viewed by different interested parties with other imperatives politically, socially, and economically.
For example, on the one hand, between 2000 and 2017, according to The European Corporate Governance Institute, 25 countries introduced legislation that mandates firms to disclose ESG information. The countries include Australia, China, South Africa, and the United Kingdom.
On the other hand, in the United States, pension funds from states such as Florida and Texas have criticized poorly sustainable investing in recent months.
As a trained economist, observing these differences in the ESG perspective, I am reminded of the tremendous economic debate between Adam Smith and Karl Marx.
They both were strong advocates of economic growth but had very different theories on how somebody should achieve this growth. Adam Smith argued that the ideal financial system is capitalism, while Karl Marx thought otherwise.
What versus How
However, it is not about what is right and wrong. If I were to ask consumers, producers, investors, and regulators what is the objective of ESG, they would all agree. ESG exists to direct and actively manage the organization’s impact on society and environmental sustainability.
From the producer’s side, as of 2020, 88% of publicly traded companies, 79% of the venture and private equity-backed companies, and 67% of privately owned companies had ESG initiatives.
More than 200 companies have signed “The Climate Pledge”; this is a pact that drives companies to reach the Paris Agreement goal of NetZero carbon ten years early.
From the consumer’s side, according to a recent PwC survey, 76% of consumers say they will stop buying goods and services from companies that treat poorly the environment, employees, or the community in which they operate.
These facts underline how Adam Smith’s “Invisible Hand” (a metaphor for how, in a free market economy, self-interested individuals operate through a system of mutual interdependence) is all set for ESG. Markets are ready and are already demanding ESG.
Marx, of course, favored government intervention. His concern was the chaotic nature of free market competition. It is true that sometimes there is a need to operate efficiently and quickly. In such times regulators have the power to speed up free-market efforts. Today, we see a 74% increase in ESG reporting provisions issued by government bodies relative to the last four years. There are over 400 reporting provisions in 80 countries.
While both Adam Smith and Karl Marx agreed on the core ideas, they differed on the production methods and the distribution of resources. Similarly, in ESG, the core idea is the same but methodologies differ across the board.
ESG – right and wrong
Throughout my academic, research, and business development experience across development economics, climate finance, and sustainability finance, I have learned that no tool is right or wrong. Some devices are more valuable than others for a particular problem for a specific organization at a certain time.
Maybe it is time to investigate the ESG toolbox and see what we have and can use to achieve sustainable and equitable growth. It is terrific if paths diverge in the race toward sustainable and honest existence. Everyone starts from a different point with different historical baggage and speed of change.
Let’s participate and appreciate these efforts. Like any other discipline with its vision of sustainable and equitable existence, ESG is more right than wrong!
Today, we live in a world that is very aware of and active in ESG issues, especially concerning capital markets.
2021 broke all records for ESG investing, with an estimated $120 billion poured into sustainable investments. This is more than double the $51 billion invested in 2020. This traction in capital markets is hopeful, but it is unequal.
We see many new ESG movements in the Exchange Traded Fund (ETF) market, and 2021 experienced a record number of ESG-related ETF launches.
The insurance market still lags.
In February 2021, BlackRock, RetireOne, and Midland National collaborated to offer what they say is “the first-ever ESG option in a Fixed Index Annuity (FIA) space.” In April 2021, Investors Heritage Life Insurance Company (“Investors Heritage”) announced the launch of a new fixed index annuity that included an environmental sustainability offering that is benchmarked against the S&P 500 index and structured in collaboration with Société Générale and Entelligent.
The insurance-annuity market needs to catch up with the current ESG movement by increasing such offerings globally.
The insurance sector is in a unique position to accelerate ESG momentum globally. From the demand side, retirement planning is essential for working professionals. This is where annuities play an essential role by helping individuals guard against outliving their assets.
An annuity is an agreement for an entity (generally a life insurance company) to pay another entity a series of payments annually. There are many types of annuities. For example, structures can include tax savings, protection from creditors, investment options, lifetime income, and benefits to heirs.
This is also a significantly large industry. The Life Insurance & Annuities industry in the US is the 2nd ranked Finance and Insurance industry by market size and the 8th largest in the US. In 2022, the industry’s market size, measured by revenue, is $909 billion. On average, it grew by 1.1% per annum between 2017 and 2022. This is the potential yet to be tapped for ESG to scale and grow.
The question, though, is how can this potential be realized? Indeed, sales, marketing, and distribution channels have a significant role to play here. If we need ESG to reach ordinary household investors, it needs to be packaged in the investment packets and distribution channels that are available to these buyers.
According to LIMRA, about 40% of the sales of individual annuities in the United States were facilitated by independent broker-dealers and independent agents (see Sales Of Individual Annuities By Distribution Channels, 2016 And 2020). That knowledge, information, and communication are integral to creating demand.
We need ESG-focused marketing to increase the demand for ESG-linked insurance and annuity products.
This will further empower the capital markets to drive finance and investment into businesses on the road to NetZero, Social Justice, and Equality.
Insurance professionals will need to understand this, and we will need more industry-specific ESG courses to train them.
On the supply side, we need insurance companies to partner with banking, asset managers, and data partners to bring more ESG related annuity products to the market.
Most importantly, we need ESG to scale down so that it appeals to everyday investors and is not reserved as a prized possession of asset managers and high net worth individuals.
Insurance and Annuity markets have the power to make ESG a more democratic instrument of real change. Now that is worth a premium!
Sales Of Individual Annuities By Distribution Channels, 2016 And 2020
Source: U.S. Individual Annuities, 2020 Year in Review, LIMRA, 2021.
As we begin 2022, it is worth reflecting on one of the big Climate Transition success stories of the twenty twenties: the growth of the Electric Vehicles (EV) market.
At the end of 2021, the UN-convened Net-Zero Banking Alliance brought together banks worldwide, representing over 40% of global banking assets. They are committed to aligning their lending and investment portfolios with net-zero emissions by 2050. As of the end of 2021, major banks have pledged a trillion dollars of lending towards climate change.
Let’s not get obsessed with existing green sectors
In the journey towards Net-Zero, we see significant commitments towards green investments. However, paving new green roads and paths will not get us there. To reach the desired Net-Zero goals, it is crucial to re-construct the non-green sectors such as utility, energy, and discretionary consumer goods.
The banks’ mantra (in driving the economy and businesses towards sustainability) has been the holy trinity of investing, divesting, and engaging. However, these decisions need primary measurement metrics.
Popular measurement metrics today on the carbon front utilize bottom-up carbon footprint data (Scope-1, 2 & 3 emissions), which is aggregated and reported by the companies themselves. Using this data is not enough as carbon-focused exclusionary strategies often drive most investments towards clean sectors such as information technology. Carbon-focused exclusionary strategies mean taking firms with larger current carbon footprints out of the investment portfolio. This strategy negatively penalizes high carbon-intensive sectors such as utilities and energy and regions such as the Mediterranean.
At Entelligent, we used this data on screening out S&P 500 companies with a high carbon footprint and noticed a 20% portfolio tilt towards the technology sector.
Source: Carbon data from ISS. Portfolio used S&P 500. We screened in 25% of the companies in the S&P 500 with the lowest carbon footprint.
To add more power to climate change we need more attention on the sectors and companies that are changing their traditional pathways and paving a more sustainable future. Re-constructing old roads can be harder than building new ones. There is always a need for additional traffic management and temporary breakdowns during re-construction.
A great example: the Consumer Discretionary sector
One sector that is overcoming all the re-construction barriers is the Consumer Discretionary sector. Entelligent’s T-Risk (Climate Paris Aligned Scores) is designed to capture these measurable and material climate transitions. When we screen the same S&P 500 portfolio using Entelligent T-Risk to choose 25% of the companies that are leading these climate transitions we see a big portfolio tilt towards this sector. Real Estate and HealthCare also get higher climate transition scores.
EV in Consumer Discretionary
Source: T-Risk from Entelligent, Portfolio used S&P 500. We screened in 25% of the companies in the S&P 500 with the best T-Risk scores.
One reason the Consumer Discretionary sector is doing so well is the inclusion of Electric Vehicles (EV). According to the International Council on Clean Transportation (ICCT), vehicle manufacturers have announced over $150 billion in investments to achieve collective production targets of more than 13 million EVs annually by 2025 (though much more could be in the pipeline).
The best part of this commitment is it is not a distant 2030 or a 2050 commitment, but a near-future 2025 commitment. We can experience this commitment together and it sets a great example for other industry groups to follow.
It’s not all about Tesla
According to the Entelligent T-Risk analysis, this sector has players that are less obvious but who are making great strides towards measurable and substantial sustainability. These players include The BMW Group and DAIMLER AG. BMW is the latest global carmaker to commit to setting a science-based target. It is also committed to procuring 100% of its electricity from renewable sources for its operations by 2050, as part of its commitment to be 100% Renewable (RE100) led by the Climate Group (see https://www.there100.org/ ). Ford is following this trend by innovating and integrating projects like the Ford Bronco Sport which uses 100% recycled ocean plastics for parts. Another example, higher in the automotive supply chain is the Swedish steelmaker SSAB which is now 5 years into a program to develop a fossil-free steel process called Hybrit. The results of these efforts are reflected in the financial returns and the balance sheet indicators of these companies.
The importance of Finance in fueling EV growth
It is good to see how banks are supporting this journey in these sectors by fueling the speed towards NetZero with large amounts of capital.
The banks’ total auto loans rose to $530.20 billion in the third quarter, up from $518.11 billion in the second quarter and $489.16 billion in the same period 12 months ago.
The top of the funders is Capital One Financial Corporation. Of the top 25 lenders, ranked by auto loans in the third quarter, Capital One remained in the No.1 spot as the top auto loan lender for the fourth consecutive quarter. With a loan book of $74.72 billion in total auto loans, the bank posted a 4.2% quarter-on-quarter and a 14.3% year-over-year rise in auto loans.
The UN Climate Change Conference, also known as COP26, which will soon commence in Glasgow, Scotland is the 26th UN Climate Change Conference. The time is getting closer to discuss the most important issue that the entire mankind on this planet is facing – “the existential risk issue”!
According to the UN Climate Change report issued this August, the world is already certain to face further climate disruption for decades, if not centuries, to come. Our future is in jeopardy. Generation Z and Generation Alpha are very worried and demanding justice.
The “Blah Blah Blah” Moment of Greta Thunberg
At the preparatory Youth4Climate event in Milan, Italy September 2021, Greta Thunberg (the Climate Activist of Fridays for Future) said: “They invite cherry-picked young people to meetings like this to pretend that they listen to us. But they clearly don’t listen to us. Our emissions are still rising. Science doesn’t lie.”
Throughout her speech she mocked the decision-makers absence of real actions, repeating the words: “Blah Blah Blah”.
Generation Z represents people that are now 9-24 years old and accounts for 32% of the worldwide population. Generation Alpha is the generation born after 2010 that has a population of around 2.5 million worldwide. The problem here is that these two generations will be most impacted by climate change but are not heard because they are far from the power that is charged with delivering immediate action.
Young people can smell greenwashing
Young people are not fools. They are objective, not subjective and they care more about facts and science than slogans. They can smell greenwashing a mile away!
So, let’s lay down some science and facts here. This is the reality:
This bleak future is what we are currently offering to our future generations. The international scientific consensus is that, in order to prevent the worst climate damages, global net human-caused emissions of carbon dioxide (CO2) need to fall about 45% from 2010 levels by 2030. Reaching net zero around 2050 goes into a black hole when this reality strikes.
Is Net-Zero even possible?
On the face of it, there is progress. The UK and France are two examples of (a few) countries that have set legally binding targets on achieving net-zero greenhouse gas emissions (NZE). About one-fifth of the world’s 2000 largest public companies, representing sales of nearly $14 trillion, now have net-zero commitments.
However, the reality is not so great. According to a report by the Race to Zero Campaign, the net-zero commitments vary hugely in their quality and only 20% of commitments meet the minimum set of robustness criteria, or ‘starting line’, as set out by the UN.
The “Blah Blah” talk from Greta wasn’t the only moment from the youth COP that epitomized the lack of communication between the most powerful generations and the activists. The gap between what is real and what is promised is the real miscommunication here.
From this communication gap, it is very clear that we need solutions for the looming climate crisis, but the real issues here are:
Activists without power
Powerful decision-makers who are not active enough
How to prioritize the most urgent and achievable
Before we go any further, let’s state the problem correctly.
The glass is 80% empty
In a public conference, the International Energy Agency (IEA) presented their latest research on world energy. We can spot immediately a stark trend. Not even the pledges so far announced by 50 countries get us close to the Net Zero Emission target that we need (see the APS line below).
Worse, the Stated Policies Scenario (STEPS) is where we are now, pre-any further announcements. Sadly, we still have no real plan of action from global stakeholders (including regulators) about how we will close any of these gaps to get us to NZE.
As Laura Cozzi, Chief Energy Modeller at the IEA stated during her presentation, “the Glasgow pledges for 2030 are covering only 20% of emission reductions gap to Net-Zero … we are actually going into the Glasgow negotiation (COP26) not with the glass-half-empty. It is actually 80% empty.”
This is why it is all Blah Blah Blah.
Why COP26 might not be the right place
COP26 is a place where all Governments from countries of any size can talk about the Climate Crisis and its consequences. But the real polluters now are a much smaller group. The top 20 global economies (the G20) are in fact are responsible for 75% of the global CO2 emissions. (https://www.bbc.com/news/science-environment-58897805).
At a recent speech to Italian MPs, the recent Nobel Prize winner, Giorgio Parisi (awarded for his studies on complex systems) “observed again the warning that if the temperature of our planet increases by more than 2° then we enter a terra incognita in which there may also be other phenomena that we have not foreseen that can greatly worsen the situation.”
Here we are not talking about any regulatory, investment, business, or economic risk. This is pure existential risk. An existential risk is one that threatens the entire future of humanity.
More specifically, existential risks are those that threaten the extinction of Earth-originating intelligent life or drastic destruction of its potential for desirable future development.
Not sure if COP26 is the right place with the right representation to address this existential risk. Not sure if Climate Submit needs 25,000 people and more discussions and questions on the table. We can’t save the planet by consuming more and more energy and fuel to bring these 25,000 people together. Pandemic has taught us to solve a lot of issues efficiently and virtually. Where are the lessons from the pandemic?
Additionally, the climate change problem needs grass-root involvement from all the representations from OECD to the developing world, from millennials to generation alpha, from all sectors. Do we have all the voices in the mix?
Climate Change: What can we do?
The macro policies required are actually well known at this point in time. These include investments in energy efficiency, electrification, renewables, and new long-term green technologies (for example green steel and cement, carbon capture, green hydrogen).
However, to push these policies forward into reality, we need to re-define the “7 Principles of Economics” (see below) and factor climate change into each of them. COP26 is a great opportunity to do this. Doing so will help to build a robust global solution that will mitigate the global risk.
Here are some drafts to help get the discussion going from “Blah Blah” to an “Aha” moment
Economic Principle 1: Scarcity Forces Trade-Off
Climate is the most scarce resource we possess at this time. You just need to check facts on carbon, carbon budgets, and the current utilization of fossil fuels. We are in a phase of existential risk, facing a huge trade-off between emissions budgets for the current generation and what we leave for future generations. What youth activists are asking is very important. If we translate what they are saying into climate finance language, it is the time where instead of discounting the future to compute NPV (Net Present Value) and IRR (Internal Rate of Return) we add a premium to set the expectations right. This will do justice to the future generations that deserve the planet they crave to live in. Let’s discount the present for carbon and not for the future.
Economic Principle 2: Costs versus Benefits
Welfare analysis is integral here and it is not just about value extraction now. Value creation should be central to all business and government activities and social accounting is getting more important than ever before. Moving forward, the rule book should factor in environmental and community externalities. We need tighter rules and participation from regulators and accounting professionals to get this right. This is not just about a discussion of accounting standards but more practically it means standardization, applications, and mandatory reporting regulations across regions and sectors.
Economic Principle 3: Thinking at the Margin
We need to expand the definition of the margin from profits to welfare. We must include externalities in business decision-making when determining the margin for consumption and investment. We should have carbon labels on every product we consume, every penny we invest, and every choice we make.
Economic Principle 4: Incentives Matter
Now it’s time to make the carbon tax real and very expensive. We need more and more global subsidies to promote alternative fuels, carbon-negative technologies, and energy efficiency. Electric Vehicles (EV’s) and solar power are not only for the rich. Let’s bring them into all communities, regions, and lifestyles. To make this real we need support and the right tax policies from regulators across the globe. We have observed over time that pressure creates performance. For example, the good news is that Cozzi also predicted that global oil consumption will peak around 2025 because of EV adoption. We need more regulatory pressures to take the necessary action on climate and provide the future that Generation Z and Generation Alpha deserve.
Economic Principle 5: Trade Makes People Better Off
We need the OECD countries to lead by example. This means accelerating the development and trading of carbon-negative technology and energy efficiency technology. We should use the principles of comparative advantage and free trade to disperse such technologies in order to speed up global healing of the planet. After all, who will care about the balance of payments if there is no humanity? We must learn, lead and share.
Economic Principle 6: Markets Coordinate Trade
Trade not the carbon. Carbon credits are corrupting the system and must be dissolved. Instead of trading carbon, companies and countries should own it and reduce it. We need markets to coordinate and trade more of the technologies that can reduce carbon. In the equation of comparative advantage (David Ricardo’s basis of trade), we need carbon cost factored in.
Economic Principle 7: Future Consequences Count
Getting our heads around the idea that we have limited resources is key today! We have to re-learn to live with limited resources as consumers. This means that carbon responsibility metrics should be added to all consumer goods. Only then can consumers account for the true future cost of their current consumption. For every product we eat, wear, use, or consume, the opportunity cost of future environmental consequences needs to be factored in and adjusted. This also means we need to revise the Capital Asset Pricing Model from its traditional definition to a more sustainable Carbon Adjusted Pricing Model.
Conclusion
We don’t need any more Blah Blah Blah. We need to better integrate carbon counting today with the existential climate risk of tomorrow. Doing this will help to redefine the global economic system and gives us a real “Aha!” moment. This is what we need at COP26.
With thanks to Giorgio Burlini and Edmund Bradford for additional writing.
A little less conversation and a little more action, please!
Financial stakeholders are eager to redirect their investments into sustainability-related ventures, and since 2018 the momentum of this capital migration has been accelerating at full speed. As of the end of 2020, the UN-backed Principles for Responsible Investment (PRI) reported Assets Under Management of more than $103.4 trillion and 3,300 corporate signatories. This is a signal of the growth of the responsible investment.
We are observing a constant increase in regulations and investor consciousness about societal, environmental, and governance (ESG) matters, and the urgency of climate change. Indeed, climate change is on the top of the list. There is also a lot of urgencies demanded by regulators and capital markets to bend the temperature curve to 1.5°C (above pre-industrial level temperatures) and plan a more sustainable and livable future for the planet.
The spirits are high and the concerns are high. However, what is missing is the definition of sustainability and more.
How can regulators and capital markets define sustainability?
What are the right measurement criteria for sustainability?
What is the taxonomy for sustainability?
These questions are still unanswered.
However, the important point that I want to make here is that world has started moving in somewhat the right direction. We are observing leaps of innovation in the renewable space with the scalability of batteries, electrolyzing hydrogen, and progress on methane. Every change counts.
The IPCC latest report on Climate Change: the risk of Climate Crisis
I totally get it that we are 10 years late for these changes to achieve the desired IPCC (International Panel on Climate Change) climate scenario of 1.5°C. The 1.5°C target relies on negative carbon emissions that are enhanced uptake. The enhanced uptake here refers to the greenhouse effect based on human activities that are adding to the warming of the atmosphere, this includes gases that increase the atmosphere’s retention of the heat energy of the sun. You can explore an IPCC interactive version as well.
First, this assumes some combination of increased land and ocean uptake, when science suggests that overall uptake, especially on land, is decreasing. Increasing overall land uptake by more than baseline assumptions in models is challenging, with background sinks (A carbon sink is anything that absorbs more carbon from the atmosphere than it releases – for example, plants, the ocean, and soil. In contrast, a carbon source is anything that releases more carbon into the atmosphere than it absorbs – for example, the burning of fossil fuels or volcanic eruptions.) declining and some even changing to sources.
Second, “net-zero” and 1.5°C assume some form of industrial sequestration, for example, BioEnergy with carbon capture storage. However, these are new, expensive and unproven technologies.
We still have hope that we can still reach under 2.0°C with the power of regulations, innovations, and capital markets. However, we do not have 10 more years to solve this puzzle of defining the sustainability taxonomy.
What we have now is a power of choice. Financial markets process complex information each and every day. The impact of climate change is no exception. The concerns of squaring out the taxonomy should not stop innovation. Instead, we should empower the innovators to build diverse workable solutions throughout the regions and sectors. We are out of time in a climate emergency and code red is upon us. We cannot wait for the perfect solution.
What we need is a series of imperfect solutions that can make our planetary future perfect for us all. The real focus should be on avoiding the climate pitfall. This can be done with real live performance rather than commitments and promises.
Tackling Climate Crisis: some simple suggestions
– We do not need any more false promises from investors and companies. We need understatements and overperformance. Keep the targets real and achievable. We cannot afford any missed emission targets in accountable global emissions So keep the targets real.
– Frame future plans rather than goals. We need more action-based plans. Keep the future closer to today 10 -50 years is too long. We need quarterly and yearly quantified, measurable standards to monitor climate progress.
– We need to crack the climate puzzle from both a macro-level, top-down validation approach and from a micro-level bottom-up approach. The bottom-up approach has self-reported data on emissions reductions, both expected and achieved, which is more important than just carbon accounting. The carbon trajectory is more important than just the carbon footprint.
– We need more power and clarity on scope, reach, and measuring progress towards climate targets. This may vary across sectors, regions, and investment strategies.
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Let us get to terms with this, but let us not forget that it is crucial for companies and investors to achieve their definition of sustainability. Show what you can promise and promise what you can show. It is high time that we changed our approach. We need more action and reality and less conversation and theory to drive sustainability!
Edmund Bradford says they want to relate the subject of ESG to the marketing profession. Pooja Khosla says that marketing people will be like the captain of the ship because they have to find out product ideas, that bring sustainability. Edmund and Pooja say that science has to meet business to create good growth. Edmund says that marketing has a huge impact because they are talking to customers continuously. Pooja and Edmund discuss the power of marketing to spread the message that sustainability is in everybody’s interest. Edmund says good marketers are multi-skilled and cross-organizational. Pooja says they need an agreement from the executive team to start the mission of sustainability. Pooja says marketers will look into how to add sustainability venturing into new markets.
Transcript of Why should marketers care about ESG
[00:00:09 –> 00:00:38]Edmund: Hello, everyone. I’m Edmund Branford, director of the Good Growth Academy. And in these short videos, we’re talking about the subject of ESG. And now in this video, I want to relate it a bit to the marketing profession where we have a lot of contacts and a lot of viewers. And I’m delighted to have with me Dr. Pooja Khosla, who’s Vice President of Client Development at Entelligent, good morning.
[00:00:38 –> 00:00:40]Pooja: Good morning Ed.
[00:00:40 –> 00:01:04]Edmund: Thanks for joining us again. And Yes, I know you’re not a marketer yourself Pooja, So you’re talking about this issue from outside the marketing profession, but why should marketers stand up and pay attention to this horrible acronym called ESG? Why does it matter to them?
[00:01:05 –> 00:02:51]Pooja: So I would say that you’re right. I’m not a marketing person by training, but definitely, I am learning marketing every day to learn and to spread knowledge of ESG more and more. Because if we talk about the ship of sustainability in an organization, I believe marketing people will be the captain of this ship. The marketing team will be the sailors on the ship to ensure that the ship is moving towards good growth because they have to find out product ideas, not only product ideas that bring revenues, but product ideas that bring sustainability. They have to be inventors of not just the product use, but consumer satisfaction also. That’s okay if I buy this product, how I am contributing to the environment, or what I am not extracting from the environment. To be very honest, I live in a really interesting town, Boulder (Colorado) where people do not look at price tags. Rather, they look into how much emissions have been produced using or getting that product to them. They are very aware and I know that this is going to spread. This is going to spread more and more as we sail towards sustainability. And now it’s time when marketers have to think like a scientist.
[00:02:53 –> 00:02:55]Edmund: That’s a very dangerous concept (ironic)
[00:02:56 –> 00:03:41]Pooja: So that’s right now they have to think like scientists in a way to innovate, messaging product future pathway of a company where they are not only increasing this revenue of the sales, but they are also bringing into concepts where people feel proud to possess those products because it is not only to satisfy a need, but it is also minimum impact on the planet. It is also a contribution towards management. So I think now it’s time where science has to meet business to create good growth.
[00:03:41 –> 00:05:21]Edmund: Actually, I think that’s a wonderful, wonderful idea. So I think many marketers maybe come in with a Master of Art background on a Bachelor of Arts background. And of course, through digital marketing, there’s far more science getting into marketing as well. So some of them are far more quantitative than they used to be. We know that understanding financials, it’s very important for markets as well. And I think from a wide perspective, there’s a huge impact that marketers can have in this area because they are talking to customers or should be talking to customers continuously. They need to be kind of helping to change the behavior of customers, nudging them more towards green options, maybe in the B2B area, you know, deprioritizing dirtier clients and prioritizing greener clients. And I would guess the more they can point their ship towards these better customers, the more it sends the right demand signals right through the supply chain, doesn’t it? People pay more for better products, higher-value products, more sustainably sourced, et cetera. That makes it easier. There’s enough for the supply chain guys to execute what needs to be done. So I think in my own saying that marketing has actually got a very big role to play here and making this happen.
[00:05:22 –> 00:06:35]Pooja: Absolutely. If we have to bend the temperature curve towards Paris goals (1,5-degree Celsius), if we really want to accelerate the speed of sustainability and we will need behavioral changes, we will need a new definition of value. And who can do that better than a person In marketing? They have the power to influence. They have the power to change how people think they have the power to create the demand for the product, even if the demand doesn’t exist yet. So I think they have to use their superpowers now to change it from inside the behavior to spread the message that sustainability is inside everybody. It is just like they have to look deep inside them and find ways how they can contribute. And I think that will come from our captains that are the people associated with marketing, people who have the power to change.
[00:06:36 –> 00:07:40]Edmund: I suppose if you’re taking your analogy of the ship as well. I mean, if the CEO is the captain of the ship, you say then maybe the marketer should be the Navigator, the kind of chief Navigator, and in your early video, you’re talking about ESG being the GPS of sustainability. The nice thing I think about good marketers is that they are multi-skilled. They’re used to working across functions with product development, finance, sales, operations. They are cross-organizational. So they used to deal with customer organizations, distributors, wholesalers, third party relationships, and actually, all those skills of dealing across the whole organization and between organizations can be applied here to try to turn this to your own company around and make it point it and help it to move to better greener water, better value market waters, as you would say.
[00:07:40 –> 00:08:47]Pooja: That is absolutely correct Ed because definitely, you are right. We need an agreement of the executive team to start with, but then this mission of sustainability value mix navigators, navigators, not only looking into where a company will progress often be the new products are who will be the new consumer targets, but navigators which will look into how we can add the sustainability venturing into new markets, how we can develop new products that we can associate closely with the change towards sustainability. So this navigation is very important, and it will become very critical to the organization moving forward.
[00:08:48 –> 00:09:02]Edmund: That’s an excellent Puja. Thank you very much. We’re trying to keep these videos short, so that’s all we’ve got time for now. And thank you again. Push for your time has been extremely helpful for anybody that wants to know more about this stuff.
[00:09:02 –> 00:09:02]Pooja: Done.
[00:09:02 –> 00:09:05]Edmund: Just look at the Growth Academy website. Thank you.
Environment Social Governance and Good Growth companies Abstract
Pooja Khosla and EdmundBradford discuss the concept of good growth and how it fits into the concept of being a good company.
Pooja says that ESG is designed to provide standardized metrics to measure how an organization impacts all the creatures that live on the planet, including human beings.
Edmund says that investors are stepping up to utilize this knowledge to support Good Growth which is beyond and better than regular growth.
Transcript How does ESG fits into Good Growth
[00:00:08 –> 00:01:11]Edmund: Hello, everyone. My name is Edmund Bradford. I’m director of the Good Growth Academy. And in these little videos, we’re looking at the subject of, ESG which is a major term used commonly when talking about sustainability, especially by the investor community. Today we’re going to be thinking about how ESG fits into the concept of good growth. And to help you with that, I’m very pleased to welcome Dr Pooja Khosla, who’s vice president of client development at Entelligent. Good morning Pooja thank you for joining us. So we talked to the last video about what ESG is, how it’s different from sustainability, and why it’s important. What is it designed to do and how does it fit into the kind of concept of being a good company?
[00:01:13 –> 00:02:11]Pooja: So Ed I would say that ESG is designed to measure to standardize for metrics of part of which is just sustainability. Pretty much why do we need accounting? Accounting, make sure that the financial goal of an organization was achieved. ESG is the accounting of environmental, social, and governance causes of the organization. When we talk about growth, growth alone is an incomplete concept. Growth needs a partner, a partner where the growth is beyond the financial fact sheet, where the organization can show growth from inside out in their systems, in their governance, in their contribution to the society, to the planet.
[00:02:12 –> 00:02:25]Edmund: It’s not just about this is a thing that I found interesting when delving into ESG, that it actually is not just about looking at an organization’s impact on the planet. Is it’s far more than that?
[00:02:26 –> 00:03:59]Pooja: It is far more than that. It is also looking at organization impact on the creatures that live on the planet, including as human beings. So it’s beyond environmental, how an organization takes its employees, how the organization takes its consumers, how it basically sets and grows the trust of the community that supports that organization. So it is much beyond just contributing to the planet. It is contributing to the people on the planet as well as to the other creatures. Like, look at the impact on biodiversity. So it contributes to everyone, every creature that lives on the planet. So in order to make sure that we achieve good growth, it is time when we think beyond financial returns. I know financial returns are the fiduciary responsibility of everybody, but we have to consider environmental returns, social returns, governance returns pretty much on par with financial returns. If we have to focus on good growth and good growth is the best way to grow, it is to grow with trust. It is to grow with confidence. It is to grow with the value creations of all stakeholders rather than just value extraction.
[00:04:00 –> 00:04:39]Edmund: From your work with the investor community. Have they suddenly all become angels now, the investor community? As I said, well, we’re doing this because actually, we all want to be good investors, et cetera. Or is there just some really hard business cases out there and evidence and research that suggests that having a company with really good leadership, I’m thinking about companies like, Unilever than really trying to become a good company? Is there more and more evidence now that investors are seeing that most of the companies or actually give them better returns?
[00:04:39 –> 00:05:57]Pooja: So and I would not say angels and demons over here, rather, I would be scientific being a scientist, it’s about information. Like even when we talk about efficient market hypothesis, perfect information is very important. Before today, before the ESG, there were a lot of blind spots. But today, because of a lot of forms, a lot of data and research companies jumping in to measure the impact of the organization on the environment, social, and governance with respect to recent technology, Artificial Intelligence, and big data. With respect to regulatory push on reporting, more companies are reporting than ever before. There is a lot of information now with this rich information. Investors have more knowledge, more guidance than they used to have before. And investors are stepping up to utilize this knowledge, this guidance to support good growth that is beyond growth and better than growth.
[00:05:57 –> 00:06:36]Edmund: Thank you, Pooja. That’s excellent. That’s very helpful. I feel like we should talk about this all day, but I think that’s really been helpful so far. In the next video, we’re going to be talking about one specific area of business with which we were involved, which is marketing, and why ESG is particularly impactful for the marketing profession. But until then, thank you very much. Put of your time. Very helpful as ever. And I look forward to our next video.
When we speak about economic growth, it is an incomplete concept. I agree that we need economic growth but we also need improvements in the quality of life and living standards. Growth without contributing to improvements in life is incomplete and selfish. It is economic development that has been always preferred over just growth.
The Economic development so far
Since industrialization, there has been more focus on corporate revenues, profits, and returns. There has been a lot of attention towards balance sheet indicators, financial reporting, and achievements by investors that can be measured and scaled by financial bookkeepers. Popular global stock indices such as S&P 500 have experienced annual double-digit returns for the last decade. In the year 2020 itself, there has been triple-digit gains for some individual stocks. Tesla stock has surged 665%, and shares of solar energy company SunPower have risen about 500%.
There is no denial that as far as global corporations are concerned the story of growth is powerful. However, this is an incomplete story when we see its impact from the development point of view.
Further, there have been repeated issues such as corruption, negligence, fraud and lack of accountability from leading global corporations. Issues such as false product claims, unethical accounting, poor working conditions, sexual harassment, trade secret misappropriation, and selling customer data have been identified and questioned. Such issues are detrimental to the quality of social and governance ethics and the value system of life.
Why ESG (Environmental Social Governance) and Sustainability have become so important.
We have to go beyond narrow growth and focus on broader development. This is where there is a direct alignment between the financial factsheet and environmental, social, and governance (ESG) structures that globally raise the quality of life of all stakeholders. Investors, consumers, producers – and especially regulators – should seriously consider ESG factors connected to sustainable development.
“We have to connect the dots between authority, responsibility and accountability.”
In the past, there has been a lot of emphasis on financial growth and authority. This has been very expensive, unjust and detrimental to the environment and some sections of society. Now, with the evolution of better data, knowledge and information on non-financial factors, it is time to raise the standards of responsibility and accountability by adding a mandatory ESG factsheet along with a financial factsheet.
Considering ESG investing looks at “extra-financial” variables (or factors) that measure development and quality.
Environmental factors qualitatively and quantitatively measure a company’s stewardship of the environment by focusing on how companies are impacting the environment by measuring waste and pollution, resource depletion, greenhouse gas emissions and deforestation. These factors also consider how companies will be impacted by both physical and transition climate change risk.
Social factors consider how companies treat people and focus on employee relations and diversity, working conditions, local communities, health and safety, and conflict.
Governance factors check corporate policies and corporate governance structures. This includes tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, board diversity and structure.
The Sustainable Development Goals
At the United Nations Conference on Sustainable Development in Rio de Janeiro in 2012, global leaders defined the path of sustainable development by stabilizing the Sustainable Development Goals (SDGs).
The purpose of this was to produce a set of universal goals that would help combat the urgent environmental, political and economic challenges. These goals are the ideal development destinations that we want to progress towards.
Today I see the G7 countries and major OECD countries like the UK, Canada and New Zealand supporting a move towards mandatory climate-related financial disclosures. The United States SEC (Securities and Exchange Commission) already has broad authority to require climate and other ESG disclosures.
The EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR) is hugely significant in requiring asset managers to disclose the sustainability value of their financial products. In Asia Pacific, countries like Thailand, Australia, Japan, and Malaysia, among many others, have implemented various kinds of sustainability disclosure policies or rules, with various levels of focus on climate risks.
In Latin America, the Caribbean, and Africa the climate discourse is less developed and still fundamentally centered on climate impacts and pockets of climate risk disclosure.
This is only the beginning. With more reporting and stronger mandates from investors and regulators to include ESG considerations, many companies will find that they do not have an option to ignore it. The rise in ESG will both drive us and track us on the path to sustainable development. Development is growth powered by measurable improvements in quality of life.
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