ESG “backlash” – Fact, fiction or a bit of both?

Bankers often work in the background, supporting investment transaction and being helpful intermediaries.  Little wonder that there was surprise and considerable comment when HSBC’s Stuart Kirk downplayed climate risk in a May 2022 conference presentation.

But Mr Kirk is not alone in asking questions about the nature and efficacy of Environmental, Social and Governance (ESG) investing.  A search for “ESG backlash” generates more than 10,000 results, principally from, but not limited to the United States. The commentators reflect politics, issues with “greenwashing” and a desire for investors to see benefits (mostly financial) for the costs incurred.

At the same time major investors, including institutional investors, continue to signal and act on elements of ESG, fully aware of the swirling issues, reflected in a commentary from the World Economic Forum (WEF) in “The big fallacy in the backlash against ESG and stakeholder capitalism.”

Reflecting the sentiment from the WEF response, Larry Fink, Chair and CEO of Blackrock, the world largest investment firm commented in 2016:

“Generating sustainable returns over time also requires a sharper focus not only on governance, but also environmental and social (ESG) factors. Over the long-term, ESG issues – ranging from climate change to diversity to board effectiveness – can have real and quantifiable impacts.  At companies where ESG issues are handled well, they are often a signal of operational excellence.”

In Aotearoa New Zealand, institutional investors have a similar focus.  New Zealand’s investment community is developing and implementing a Stewardship Code for Aotearoa  through Toitū Tahua | Centre for Sustainable Finance.  Those developing the Code comment:

“Accountability, transparency, fairness and responsibility are the basic principles of governance and they define behaviour. Effective governance by investors puts a focus on the longterm health of the capital markets. It helps build trust between companies and other issuers, investors and the community.

As investors and asset owners, we can, and have a duty to, influence. We have a responsibility to steward companies and other issuers to ensure good governance and sustainable business practices – practices that protect our financial system, our environment and our society. A Stewardship Code will provide the principles investors need to support the future we all strive for.”

IoD’s Four Pillars of Governance Best Practice section 1.3 Sustainability and climate action reflects these perspectives and makes three key observations for boards:

1. Take a longer-term organisational sustainability perspectivethat moves away from a focus driven by pressures to deliver short-term results.  This was covered in the paper Short-termism: GNDI policy perspective from May 2014.  The paper recommends boards consider developing and disclosing a clear framework for managing long-term value creation.
2. Leverage the positive impact transparency to build trust and confidence in companies and other organisations and demonstrate good governance through a focus on key strategic social, governance and environmental risks.
3. Ensure that long-term value creation and organisational sustainability are defined in a range of ways including through charters, values, or vision or missions statements, while ensuring that the areas of strategic focus and measures are meaningful to the organisation, go beyond compliance and link effectively to the organisation’s strategies, priorities and risks.