ESG in Peril
Will corporations save us from the climate crisis?
Two years ago, BlackRock´s captain, Larry Fink caught capital markets by surprise with his memorable letter to the CEOs. His message was brief but powerful: “climate risk is investment risk.” The letter came a few days after the release of the World Economic Forum Global Risk Report which ranked climate and environmental risks at the top of its table, above geopolitical, economic, and technological risks.
For those who follow the sustainability agenda, Larry Fink´s move was a game changer in a world threatened by increasing climate impacts and a lack of government response. Excited with a new hero in the block, we applauded the possibility of having government failures addressed by the power of the markets.
E is the winning letter in the ESG acronym
Since then, environmental, social, and corporate governance (ESG) investment has boomed. But in the ESG acronym, the letter E is winning the race with a massive trend of net zero emissions targets and claims both by corporations and by financial institutions. More than $35 trillion dollars in financial assets worldwide are said to be monitored by some kind of sustainability standards, an increase of 55% since 2016. Investors, financial institutions, and companies have embraced fancy alliances, principles, and frameworks to reduce their carbon footprint going from the Task Force on Climate Financial Disclosure (TCFD) and the International Sustainability Standards Board (ISSB) to the Principles for Responsible Investment (PRI) and the Glasgow Financial Alliance for Net Zero (GFANZ). The GFANZ gathers 500 banks, asset managers, and financial service institutions worth over $130 trillion dollars.
Larry Fink´s mantra remained alive in subsequent letters and its influence defined the composition of some corporation´s boards sponsored by BlackRock’s assets. Members with environmental and sustainability backgrounds replaced traditional profit maximizers and high-polluting companies were requested to adjust their business models. Moreover, the market value of oil and gas companies declined and some of the major ones announced structural changes to their long-term strategies.
A long way to go for true accuracy
But the potential of having corporations setting rules and standards for a clean economy through their market power is starting to concern governments, investors, and society. Attorney generals from 19 US conservative states have accused BlackRock of selling its customers short by pursuing an “activist” agenda on climate change while the New York City´s Office Comptroller is telling BlackRock it was shortchanging investors -and the planet- by “backtracking” on its climate commitments.
In the end, the primary goal of companies should be to create value for investors in the long term. Sometimes, this goal might be compatible with slashing carbon footprints, but there is still a long way to go before companies fully internalize the pollution costs and emission reduction frameworks to improve their accuracy and comparability.
Can the ESG package be integrated efficiently?
In addition, the question remains whether the three components in the ESG package can be integrated efficiently, or should be treated separately. In certain sectors and circumstances, they could run in different directions causing confusion and measuring nightmares. For example, closing down a coal mining firm is good for the climate but awful for its suppliers and workers.
There is no doubt that financing is a paramount driver in the transition to a low-carbon economy. However, it is in the court of governments to champion their leadership role both in penalizing polluters and in sending the right signals to capital markets for an efficient allocation of assets.