ESG - three letters you should know more about

August 11, 2011

I had the privilege of chairing the inaugural Enhanced ESG Analysis Conference in London last week, where 75-80 speakers from organizations as diverse as Forum for the Future, The UN Principles for Responsible Investing, STOXX, Thomson Reuters, EIRIS, and HSBC shared their views on different aspects of the sustainability movement. Attendees were primarily from Europe, where adoption rates of sustainable business practices and standards are generally higher than in Asia or North America. While each of the 12 presentations contained a unique take on ESG, I would characterize the speakers as falling into three distinct groups:

  1. Advocates, who believe that sustainability adoption is a moral imperative that will help preserve our planet's resources for future generations
  2. Skeptics, who understand that ESG factors can help identify potential risks, but are less than convinced about the relevance of ESG in investment decision-making
  3. Objectivists, including Brandlogic, who are seeking to help individual corporations determine how best to measure their performance against these factors

A sustainability Advocate, Jonathan Porritt from Forum for the Future, led off the proceedings with a speech filled with pessimism, bemoaning the fact that Coal India's recent IPO prospectus contained no mention of the societal risks their business causes. He then turned to optimism, noting that we are approaching a "grid parity moment" that will occur in 2016 - when a kilowatt of energy from sustainable sources will soon cost as much as one created through existing, carbon-based resources.

The Skeptics included mostly credit analysts and hedge fund managers. Rory Sullivan from Ethix SRI pushed back hard against advocating for more ESG inputs to investment decision making, saying "Most of what's written about ESG is advertising and investors should just throw it away." Larry Abele, who runs Auriel Capital out of Jersey in the UK, cautioned against too much "long-termism" from the ESG community: "Let's face it - the short term is more important to my investors."

In the Objectivist camp, my colleague James Cerruti presented a summary of our Sustainability Leadership Report, which measures actual vs perceived performance on environmental, social and governance factors for 100 leading global corporations. Our report engendered a lively debate about reality vs. perception and how some companies are potentially risking their reputations by over-promising relative to their actual performance.

The diverse and eclectic nature of the conference is what kept many of the attendees in their seats until the very end. It was clear by the end of the event that ESG is not just another management fad - it is the foundation for an emerging management practice that will drive corporations and governments to think more about their relationships to the planet, its natural resources, and human society at large.

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