Attending the FT Global Banking Summit and Net Zero Investor’s Annual Conference in December, Financial Promoter looks at environmental, social, and governance taxonomies, how they are evolving, and who is carrying the can.
Almost 20 years ago, a report by the United Nations carried what is believed to be the first mainstream mention of ESG in a modern context.
The term indicated how a person, company, or organisation would consider environmental, social, and governance principles across various aspects of business should they choose to do so, which, in 2004, few did.
However, although the basic elements that made up ESG had been around for many decades, the report was a catalyst for increased international attention and campaigns around the issue – and there has been little time to draw breath since.
As ESG was brought into the mainstream, and those outside finance began to notice, organisations had to be seen to be taking part.
Some embraced it with great gusto, others reluctantly edged closer, partially coerced by regulation, while some financial institutions have been accused of using ESG as nothing more than a tick-box or marketing exercise.
Yet, whatever the deep-seated feeling towards this new approach to capital allocation and management within the world’s financial institutions, it’s little wonder that events devoted to ESG in the finance industry are on the rise each year.
Sector-specific events often host dedicated sessions, enabling rigorous debate, claims of innovation and nailing of colours to masts all across the financial services industry. Held in December, the FT Global Banking Summit is a three-day event that hosts some of the top industry influencers.
Leaders in sectors spanning financial crime to open banking debated the future of the industry in keynote interviews, panel discussions, and group masterclass sessions.
Sponsors and exhibitors included leaders in the industry, including Deloitte, IBM, LSEG, Mastercard, and Starling Bank.
As well as the usual business development cohort, the event was also host to chief sustainability officers and ESG leads.
There was a notable feeling that ESG was on the minds of even the top banking CEOs. A 55-minute masterclass session titled “How to define ESG and measure your business impact” featured speakers from Standard Chartered, the Financial Conduct Authority, and Green Finance Institute.
Classification conundrum
The acronym ESG builds on previous terminology, CSR – corporate social responsibility – which was evolved to steer away from it being seen as a purely corporate benefit.
At the FT Global Banking Summit, Rhian-Mari Thomas, chief executive at Green Finance Institute, was questioned on the choice of “green” in her organisation’s name.
“We need a classification on what is green and what is not green,” she said. “The EU has tried to pioneer this; it’s gotten into a bit of a muddle.”
There are 50 taxonomies around the world at the moment, according to Thomas. “There is an opportunity to harmonise in a taxonomy 2.0, while taking into account local context and social focus.”
However, harmonising these taxonomies comes with trade-offs and complexities, said Thomas, and she urged to the sector away from wasting time on the intricacies of the acronym.
“When you start politicising the discussion, getting distracted by some of the terminology, and not the actual fundamental principles, that is where we are going potentially in the wrong direction –scientifically, economically, morally, there is a right and a wrong thing to do,” she added.
Desiree Fixler is on a mission to blow the whistle on some of the more troubling aspects of ESG, having exposed greenwashing at DWS in 2020.
Now, somewhat of a celebrity in the field, she is an ESG advisory committee member at the FCA, a member of CFA Institute’s ESG Committee, and a member of the London School of Economics Ventures Advisory Board.
While Thomas views the debate around taxonomies as a “social license,” Fixler argues it’s a case of fiduciary duty.
“If you’re going slap a sustainability label, or an ESG label on your product, don’t charge five basis points up front. Because guess what, your investors are not sustainable anymore,” she said.
“We don’t need to use the word ESG anymore. Why do we need these labels? I’d even question: why do we need sustainability reports? It’s just bedazzled marketing – it’s not needed. Everything should be integrated into the annual report.”
Familiarity breeds contempt
According to Fixler, the terminology is broken – so much so that finance leaders are backing away from the acronym. “It has served its duty,” she said.
“It raised awareness on corporate sustainability reporting, but then it got too big and became too murky.”
She noted that ESG can be melded into what the user needs it to mean – from risk management to impact. “It was weaponized in the US,” she said.
“It’s led to an overly burdensome death by 1,000 disclosure regulation requirements in Europe. And we’re now seeing conflicting reports on performance,” said Fixler.
Performance, after all, is king and key to all financial services professionals. To avoid the inevitable blame game, ESG and sustainability should be considered a regular – and mandatory – way of businesses being progressive, she claimed.
On the north bank of the Thames a week later, a group of investors that needed less convincing of the merits and positive results of ESG gathered to discuss best practice.
Net Zero Investor’s second annual flagship conference brought together asset managers and owners. The publication provides written, streamed, and in-person content to help investors track the roadmap to net-zero.
In a session on the energy transition, Kingsmill Bond, senior principal at non-profit organisation RMI, told the room that the terminology of ESG was holding investors back.
“ESG has done a great job of getting these issues onto the agenda. It was what was necessary,” said Bond.
“Now we have an economic case, we can do what we’re good at in finance, which is working out how to make the most money.” With ESG as step one, Bond believes step two could be termed as Energy System Thinking (EST), keeping with an acronymic approach.
For many, the status quo fits just fine. One attendee says the term ESG is a non-judgemental alternative to some that have been mooted.
Marketing ESG
Research by the FCA in November – ahead of its crackdown on sustainable investment products, which outlined new guidelines around sustainability – exposed a lack of investor confidence in sustainability-related claims, especially in the use of inconsistent terminology such as “ESG,” “green,” and “sustainable.”
The package of measures released by the regulator included the requirement for “transparent marketing” to build trust among consumers.
At the FT Global Banking Summit, Fixler said that the reception to ESG has changed over the past decade, and the term itself has had to flex too.
“ESG was promoted too much as win-win and it was very much a marketing strategy. That led to a hell of a lot of greenwashing,” said Fixler.
Greenwashing has become the name for the marketing gimmick in which companies make misleading statements – intentionally or otherwise – about the environmental impact of their policies, productions, or operations. It has been the focus of investor groups, regulators, and a growing number of consumers.
“That bubble has been burst,” said Fixler. “I think companies are approaching this more sensibly in that ESG is for business adaptation and not something to market, there’s no win-win here.”
However, a RepRisk report noted that banking and financial services have seen a 70% increase in the number of climate-related greenwashing incidents over the past year – maybe the burst is still filtering through, but marketing and communications teams need to take note, according to Fixler.
“What’s most important is to ensure that your company is being well run, and you don’t have the marketers taking over from what the business is supposed to be doing,” she added.
“We need to go back to more precise language.”
There’s no doubt that ESG has become a buzzword, and it encompasses everything from climate change to employee benefits to stakeholder engagement.
With buzzwords, come a multitude of opinions, but it boils down to responsibility – for the planet, for employees, and for company outputs.
It’s clear that those outside the marketing and communications function are holding those inside it accountable for the overuse of the terms – but where the responsibility really lies still seems to be up for debate.
This article is taken from the Winter 2024 print edition of Financial Promoter. Click here to subscribe.