Environmental, Social, and Governance (ESG) efforts are now an integral element for organizational success. As such, disregarding them is a disastrous step for corporations and countries. For me, ESG investing goes beyond the three letters acronym to address how a company serves workers, communities, customers, shareholders and the global environment.

In another article, I wrote on Nov. 2 about the risks and opportunities of climate change, I highlighted the concerning facts about climate change and how they are accelerating ESG adoption. Key among them is the increased frequency and intensity of climate induced natural disasters and their corresponding damage and losses. What makes climate risk even more concerning, is that many of these disasters are now occurring in geographical regions which historically were not affected by climate shocks. These disaster cause billions of dollars in annual economic losses, and according to Munich and Swiss-Re (European Insurance Giants) by 2050 climate disaster cause $23 trillion in global GDP corresponding to 11 to 14 per cent off global economic output. This points to the need for immediate actions to ensure that countries and companies have adequate resilience systems in place and ESG strategies, and frameworks.

For the private sector, the escalating environmental urgency, has translated into increased pressure from governments and consumers to ensure that corporations do more for the planet and for society. On the other side of the equation, for businesses, the challenge has been prioritizing ESG strategies without compromising business growth and shareholders returns.

As momentum around ESG investing continues to increase, the data shows that corporations and capital markets can create value from taking a more sustainable and inclusive approach as envisioned by ESG. This is why ESG is becoming a top priority for boards, management teams, capital markets and governments. As a result, sustainable investment has increased significantly since 2000 reaching today $30 trillion. This represents a 10x growth since 2004 and a 68% rise from 2014. Additionally, over the last 24 months, ESG stocks have outperformed the market and have showed they can withstand bear market conditions. ESG companies are more resilient during periods of high risk and high market volatility such as the recent COVID-19 pandemic. Nonetheless, such investments still need to grow and get better structure and governance, if the world is to reap maximum benefit from ESG investing.

Going forward, much of the ESG trends will rely on stronger policies, disclosures, scoring and frameworks that should be developed to drive ESG growth and prioritization. Good work has been done by the EU, and US regulators, supported by global foundations that are promoting better data collection, benchmarking, and reporting. Additionally, other sovereign countries, including oil and gas producers like Saudi Arabia, and the United Arab Emirates are contributing to ESG growth among carbon intensive industries, and are capitalizing on the high returns promised by ESG.

The Role of Corporate Activism

The coal, oil, natural gas, cement, and steel producers are most under pressure to reduce their carbon intensity and become more ESG compliant. The key pressure points for them, are corporate activism, divestment and reputational risk. For major hydrocarbon companies, the choice is simple; take action or face the backlash that would hurt their corporate reputations. Two major institutions that are capitalizing on ESG and that (pushed by their board activism), stopped investing in fossil fuels are Harvard University (now supported by 1300 education institutions in the US) and BlackRock, one of the largest asset managers in the world. Over $ 15 trillion have already been divested from carbon intensive industries since 2010, and this trend will only continue as climate policies and activism will start to bite.

ESG Frameworks

Although corporate activism is a great step forward, it’s not enough. For ESG and impact investing efforts to yield long-term results, they need much stronger foundations. This can only come in the form of robust policies and frameworks, reliable scoring mechanism and systematic data-collection. Fortunately, things seem to be going in the right direction. The US has rejoined the Paris Climate Agreement under the Biden administration. Accompanying this decision, is the overall Biden Climate Plan and Resiliency strategy seeking to reduce greenhouse gas emissions by 50-52% by 2030 (as it compares to 2005 levels), while positioning the US towards a more ESG focused footing. The Biden plan is boldened by the USD 3.5 trillion infrastructure plan (still not fully approved), which has huge implications for resiliency, ESG and impact investment. More importantly, the US Administration has prioritized coordination between key decision makers such as the Security Exchange Commission (SEC), the Treasury, and the National Economic Council (including its climate advisors) to ensure that ESG is effective and economically feasible. These stakeholders are working together to identify, measure, assess, and disclose climate-related financial risks for government programs, assets, and liabilities. These will also help identify financing that would help achieve net zero emissions by 2050; and analyze areas where public/private investments can support such financing.

As I explained in my article ‘Is ESG Still in Its Infancy Stage’ of September 2021, regulatory actions are increasing and over 60 Central Banks President are coordinating closely their Climate Risk and ESG plans. Aside from the US, and Canada, the European Union established the European Green Deal to regulate and standardize climate data tracking disclosure and reporting.  At an international level, the UN COP26 Glasgow of November 2021 helped consolidate ESG good momentum, promoting greater partnership with the private sector and with capital markets.

ESG Investing Outlook

ESG makes good business sense. As such, there is cause for optimizing efforts and investments. Government and private stakeholder now working together in meaningful ways. This, along with corporate activism, divestment pressure, and “climate-tipping points” is providing the necessary foundation and accountability for ESG to be streamlined. However, arguably the best part is that ESG is now an incentive for corporations as ESG helps reduce operational costs while creating value. Therefore, I believe ESG will soon become the new bottom line.