ESG in context
ESG is an umbrella concept. The framework has two domains: the first is corporate environmental, social and governance standards and the internal management of associated risks. The other is the disclosure of such obligations to the public. The umbrella concept contains different specific methodologies. The European Commission mentions in its 2020 study that there are about 150 green and ESG certification and accreditation bodies, each one using its own methodology, which makes the comparison of results very challenging.
The most commonly used standards so far have been the GRI, which is based on a general approach, and SASB, which focuses more on sectors and climate-intensive industries. The CSRD (Corporate Sustainability Reporting Directive), adopted by the EU in November last year, must be implemented by Member States until 2024. The Directive has become widely known as CSRD, however, this acronym is somewhat unfortunate as it can be mistaken and perhaps in some cases has been mistaken for the more widespread CSR (Corporate Social Responsibility), whose application is basically voluntary and which focuses mainly on charitable acts. The EU published its set of standards, ESRS (European Sustainability Reporting System) at the end of July this year, – which, at first, is mandatory for about 50,000 companies that operate in Europe. ESRS can be considered as the CSRD’s implementation instructions, and will certainly become the norm for companies operating in the domestic market, too.
However, this is all happening against the backdrop of negative news about ESG. Some of these are about measures based on ideology that question the results of scientific research, deny climate change and reject any intervention in the economy. Ron DeSantis, Governor of the state of Florida, announced a law this spring intended as an example for other US states, which excludes green bonds and ESG considerations from investments by the state’s financial funds and state procurement processes. Florida has already divested its assets managed by pro-ESG BlackRock in 2022, which, like other market players, no longer uses the term ESG, which now has an overly political connotation there. However, on the other side, the fund manager is struggling with activist shareholders who are submitting a growing number of proposals for objectives that the management considers to be unrealistic and lacking any economic rationality. Furthermore, the radical political proposals on climate objectives have caused a lot of tension in the corporate sector in Europe, especially in Germany at the moment. Finally, the latest news is that the S&P Global credit rating agency has stopped rating companies based on ESG criteria, due to the growing number of questions regarding the reliability of the metrics and criteria.
Nevertheless, this doesn’t mean that ESG has failed, far from it. Corporate surveys conducted in the US revealed that these type of measures are spreading and are unstoppable, it’s just they are not always called ESG. S&P has not eliminated ESG aspects, only scoring, which had limited reliability. However, it considers the non-numerical, written assessment important and effective.
The aforementioned facts highlight some of the uncertainties and dilemmas associated with this topic. CEOs are faced with the flow of superficial information that suggests complexity and comes with a roar, however, there are few real measures taken. Besides the difficulties of data collection, the expected and unknown costs of establishing the system and the measures to be implemented are key causes of this headache. However, there are still no normative measures, such as emission-based taxation, that would reduce payback periods and encourage decision-makers to move towards lower emissions. No wonder most companies consider the implementation of ESG systems a hassle.
