Environmental, social, and governance efforts are now an integral element for organizational success. As such, disregarding them is a disastrous step for corporations.

In another article, I wrote about the risks and opportunities of climate change. I go on to highlight the evidence of climate change in recent decades. Key among them is the increased frequency and intensity of natural disasters. Moreover, they’re even occurring in uncharacteristic places which were historically not affected by climate induced disasters.

From the damage and economic losses they cause, the economy loses billions of dollars annually and according to Munich and Swiss-Re (European Insurance Giants) by 2050 disaster events could cause damage and losses of at least 10% of Global GDP. This points to the need for stern actions and frameworks in relation to climate change and the global environment.

For the private sector, this has come with increased pressure from the government and consumers to do more for the planet and for society. However, the challenge has been investing in such initiatives without compromising business objectives.

With momentum around ESG investing continuing to increase, it’s evident that organizations can benefit from taking a more sustainable and inclusive approach. This is why it has become a top priority for boards, management teams, and governments over the last decade.

As a result, sustainable investing has increased significantly over the last two decades to reach $30 trillion. This represents a 10x growth since 2004 and a 68% rise from 2014. Nonetheless, such investments are still wanting, if the world is to reap maximum benefit from ESG investing.

Much of this is largely reliant on the policies, disclosures and frameworks that will be put in place to drive it forward. Preliminary work has been done by the EU, Canadian and US regulators, supported by global foundations that are promoting better data collection, benchmarking and reporting.

The Role of Corporate Activism

Being large carbon emissions contributors, there are calls for corporations to decarbonize. This is especially so for those in sectors that contribute significantly, such as oil. Such companies have and are working towards their de-carbonization efforts. But, a key accelerator for their efforts is corporate activism and divestment pressure.

Along with being effective, corporate activism is also infectious and is spreading across the country. For major oil companies, the choice is simple; take action or face the backlash that may come. Notable institutions to make good on their promise to divest from the fossil fuel sector is Harvard University and BlackRock, an asset manager.

While it’s a great start, efforts in the US should at least match those in Europe. There, large shareholders’ and asset managers’ targets go beyond oil companies and other carbon intensive sectors. By leveraging their influence, they’re pushing boards to vote for de-carbonization measures. Some of the sectors being targeted include petrochemical, coal, cement, and food which are the sector where we are observing divesting pressure.

Local and International Frameworks

Although corporate activism is a great step forward, it’s not enough. For ESG investing and sustainability efforts to yield reliable long-term results, they need a much stronger foundation. This can only come in the form of robust and transparent policies, frameworks and data-based system.

Fortunately, things seem to be going in the right direction. Domestically, the US has rejoined the Paris Agreement under the Biden administration. Accompanying this move is the Biden Climate Action seeking to reduce greenhouse gas emissions by 50-52% by 2030. This reduction is in comparison to the 2005 levels. The Biden plan is propelled (if approved by the USD 3.5 trillion infrastructure plan).

More importantly, the Biden Action combines the efforts of public and private stakeholders. A key reason for this is to ensure that ESG efforts are effective and economically feasible.

Canada regulators, policy makers and legislators, are playing catch up as well, and national investors are increasingly seeking ESG benchmarks to balance their opportunity and risk. Furthermore, the largest Canadian pension funds made it clear that sustainability will be prioritized in their future investment criteria as these are believed to significantly contribute to value creation. As the 4th world’s largest oil and gas producers, Canada is expected to ramp-up its ESG efforts to maintain its competitiveness. Some promising efforts are also visible in the Canadian banking sectors, where the Canadian Imperial Bank of Commerce has embraced sustainability as a way to boost its competitiveness. It’s investments on carbon capture and renewable energy have paid off and will propell the bank strategic growth throughout 2022.

As I explained in the ‘Is ESG Still in Its Infancy Stage’ article, regulatory actions are increasing and disclosure will become mandatory for most OECD countries between 2022-2023. Aside from the US, and Canada, the European Union now has the European Green Deal. It seeks to regulate and standardize data tracking disclosure and reporting. 

At an international level, the UN COP26 Glasgow has helped build upon key climate change initiatives. Among the key outcomes of the summit were clear market signals for a better structured partnership between the private and public sector for a more resilient global environment.

ESG Investing Outlook

As I detailed in a recent Bankless Times, ESG makes good business sense and it is increasingly driven by market and policy coordination. As such, there is cause for optimizing efforts and investments. Government and private sector players are now collaborating in meaningful ways. This, along with corporate activism, divestment pressure, and “climate-tipping points” will provide the necessary foundation and accountability.

However, arguably the best part is that ESG is now a clear incentive for corporations. A Mckinsey reportdemonstrates that ESG investing helps reduce operational costs and also creates value. Therefore, while it may not yet be, ESG will soon become the new bottom line.