EconomyESG, a discipline under construction

ESG, a discipline under construction

(Expansion) – The movement that proposes managing companies with a greater focus on environmental, social and corporate governance risks, as well as the impact that their operations have on different interest groups ( stakeholders ), is known by the acronym ESG.

In recent months, this movement has been criticized from fronts as diverse as businessmen and investors with global recognition (eg Elon Musk or Peter Thiel), conservative politicians (eg former Vice President of the United States, Mike Pence), officials of financial institutions and fund managers (some turned into whistleblowers or anonymous whistleblowers) and even by environmental experts.

Criticism ranges from calling it a “perverse instrument” to introduce the woke agenda of the left in the business world, to considering it harmful because it “steals attention” from the central issue of climate change, and even those who see it as a “curtain of smoke” that allows companies to hide behind a narrative that lacks substance.

A couple of weeks ago, the influential magazine The Economist dedicated its special report to ESG, with a cover titled “ESG. The three letters that will not save the planet. The report highlights several challenges of the ESG movement, including: the fact that adding environmental, social and corporate governance issues can lead to diffuse and even conflicting goals; the questionable veracity that the good behavior of companies is more lucrative, when it frequently implies costs; and the lack of rigor and consistency in ESG disclosure standards and ratings .

This report has generated great conversation and debate. There are three points I would like to highlight:

The ESG movement is not a substitute for government action . It is clear that the great challenges facing humanity cannot be solved by working in silos. On the contrary, they require close collaboration between governments, academia, private companies and civil society. Companies have proven to be platforms of innovation and scale to solve problems, on many occasions, with greater speed and effectiveness than governments.

However, this does not imply that governments should stick their hands out and leave issues in the hands of companies. The fight against climate change is a clear example where national and supranational governments must take decisive and coordinated actions, not only to improve disclosure standards in environmental matters, but also to ensure that companies assume the cost of their externalities. The best example is the urgent issue of carbon taxes.

Standardization is a pending issue, but it is moving forward. The multiplicity of ESG criteria and metrics and their inconsistency generate confusion and inefficiency. For years, companies, investors and experts have pointed out the importance of standardizing these criteria and metrics to contribute to better decision-making.

A few days ago, the IFRS (International Financial Reporting Standards) Foundation announced that it had completed the consolidation of the Value Reporting Foundation (Sustainability Accounting Standards Board), following up on the commitment made at COP26 to consolidate the personnel and resources of the main initiatives of Disclosure of sustainability for capital markets globally.

Achieving the level of rigor and transparency that financial reports have today has taken centuries, and they remain under constant review and refinement. It stands to reason that building a system like ESG reporting, and integrating it into financial reporting, will take time. The important thing is that you keep moving in the right direction.

ESG rating should not be confused with impact investing . ESG is a process to manage the relevant risks of a company in environmental, social and corporate governance issues, as well as to identify opportunities in these areas.

For this reason, the rules on disclosure of information are focused on improving the quantity and quality of information that companies disclose in relation to the impact of climate change, to point out one of the ESG issues, in their operations and in their results. financial. This information helps investors assess the financial risk of the stocks and bonds issued by the company.

Thus, a good ESG rating does not necessarily imply that the company has projects with a positive impact on its stakeholders, but rather that it manages risks well. Thus, fund managers must be clear in their product offerings. For example, is it an ETF of companies with good ESG risk management or of companies with projects that measure their positive environmental or social impact? These are two different issues and investors deserve clarity.

In summary, I agree with several of the criticisms pointed out by The Economist and I have a different point of view on some points. However, I fully agree with what I take to be the conclusion of your special report: ESG is a concept that requires significant review and improvement efforts, but should not be dismissed. It is worth building on this movement that, if well conducted, raises the standard of behavior for companies.

Editor’s note: Pablo Jiménez Zorrilla is a partner at Von Wobeser y Sierra, SC Follow him on . The opinions published in this column belong exclusively to the author.

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