ESG and Sustainable Development
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.
The amount of carbon dioxide piling up in Earth’s atmosphere set a record last month, reaching the highest levels in human history. By the way, speaking of carbon budgets, it is worth noting that the world only has 8% of its carbon budget left, which will be exhausted in the coming decade at current emission rates, according to the Global Carbon Budget report 2020.
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.
Some examples here are the major data breach in the Facebook – Cambridge Analytical scandal, the Wells Fargo 2000 phony accounts , Abercrombie & Fitch’s modern slavery conditions, Nike and Adidas and child labor. Indeed, there are very many corporate examples where social and governance values have been compromised to maximize financial and accounting growth.
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.
However, we need a GPS to ensure we are on track with these goals. Enriching and enforcing ESG standards will ensure just, sustainable and inclusive corporate development which is much more than just corporate growth.
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.