Gauging 'the risk the world poses to a company, not the other way around'
The following blog was written by Sara Olsen
For those following the movement to enable capital markets to understand their impact on climate and human well-being through "ESG and impact" disclosure standards, this recent piece from Bloomberg Businessweek is a must-read. They report (emphasis added):
"[MSCI's Chairman and CEO] Fernandez concedes ordinary investors piling into such funds have no idea that his ratings, and ESG overall, gauge the risk the world poses to a company, not the other way around. 'No, they for sure don’t understand that,' he said in an interview in November on the sidelines of the COP26 climate change summit in Glasgow, Scotland. 'I would even say many portfolio managers don’t totally grasp that. Remember, they get paid. They’re fiduciaries, you know. They’re not as concerned about the risk to the world.'"
As an example the authors note that when the goal is to measure the risk the world has on the company, carbon emissions do not affect McDonald's ESG rating according to MSCI, despite the fact that McDonald's core product– the hamburger– is made from livestock that by some estimates contributes 14% of the world's emissions.
Though the mainstream ESG ship is branded as if it is going to take us to the promised land, it has no rudder. Tragically, ESG may be the biggest greenwashing bubble the world has yet seen.
What will that missing rudder be made of? Real "impact" standards.
Impact standards and their champions do have the tools to understand what "the company's risk to the world" is. These include Social Value International, Capitals Coalition, SDG Impact Standards, Impact Management Project and Science-Based Targets. The reason is that these impact-oriented approaches focus on identifying who is being affected by an enterprise's activities, what natural resources the enterprise depends upon to do its work, and how it affects those people and resources through its operations and products. These approaches assess the nature and depth of the effects people and the environment experience, the contribution of the company to these changes (as opposed to other factors), and even weight how important those effects are from the point of view of science and/or the affected parties themselves. They enable this information about impact to be obtained, understood, and acted upon.
But even so, impact information is not necessarily going to be acted upon in a way that results in better well-being for those affected if the decision-makers considering that information have only one objective: profit.
So it is increasingly obvious that despite having better information about their effects on people and the planet, companies will continue to do what they are currently required to do, which is consider 'the risk the world poses to the company,' not the other way around. This will continue until the actors who run companies and comprise the capital markets are required not only to report on their impacts, but to integrate actual improvements to the well-being of people who are affected by their activities into their mandatory disclosures.
Money, and capitalism, are agnostic about human well-being. So playing the current ESG model out for another few decades, we are on track to have a denuded planet with (even more) extreme inequality, eroding well-being for (more) billions of people, a few unfathomably rich, and a whole economies full of enterprises that will continue to profit.
This is why it is crucial that the new International Sustainability Standards Board, United States Securities and Exchange Commission, and other regulatory bodies globally ensure that companies disclose both the significant effects they have on people, and how the company is improving those effects over time, even if they don't soon hit the financial bottom line.
And then, it will be up to the asset owners– all of us– to use these impact assessment approaches to ensure that our money is being used in places that at minimum avoid harming others, and at best contributes to others' well-being too.
#climatesolutions #climateaction #impactmanagement #esg #esginvesting #impactmetrics #impact