The ESG distraction
There has been exponential rise in the amount of time, effort and money being diverted by companies to ESG analysis and reporting. Firms are paying outrageous amounts of money to consultants to do their scenario analysis. ESG data reporting tools and software are cropping up every day. And we’re all too distracted building a competitive advantage through superior ESG analysis. And regulations seem to want only increase this burden on firms. But is this a mere distraction from the real issue? Is it a lack of data or lack of will that is the actual problem?
Taking a step back — there are two key dimensions to a company — (i) what it produces, and (ii) how it produces it. While a company can be on a spectrum of good to bad ESG performance on the second dimension (e.g., robust supply chain policies, good diversity and inclusion etc.), there is a simpler distinction for the first dimension that requires little data, and more common sense. The types of products or services a company offers are either aligned or misaligned with a net zero world. For example, coal extraction, oil and gas exploration, mining are all activities that are misaligned with a net zero world based on science (IPCC). Why then does it matter if the operations of these companies are good ESG practices, if majority revenue is still being derived from activities that are misaligned? Why are we still investing in companies that are doing well operationally on ESG, but entirely misaligned on a product / service level with ESG / sustainability. We don’t need more regulations or data to tell us that certain activities are misaligned with a net zero world. Why then are asset managers, regulators, investors and banks focused on the operational alignment rather than using product alignment as the first screening criteria? What are we hoping will come out of the increased regulations, that we don’t already know? What data is not available to us now, that is stopping us from taking action?
Just something that’s keeping me up at night lately…
