There has been a lot of talk and confusion around ESG over the past year.
Let’s explain some of the confusion.
Sustainability is the ‘E’ in ESG. It is doing fine.
When a company expands its internal policies to include systems, documentation and disclosure to improve on the ‘S’ (ie, Social) and the ‘G’ (Governance), good things also happen. So, this is also fine.
The problem occurs when financial markets, looking to capitalize on the excitement over the movement, create and market ‘ESG funds’ and fill those funds with organizations before proper standards are created for vetting.
The issue is not whether ESG is beneficial at the operating level; but that the financial markets, looking to capitalize, created products they did not understand; and without standards to guide them.
In this WSJ article, Bank of America Chief Executive Brian Moynihan responded to criticism of ESG.
Speaking on a panel in Davos, Mr. Moynihan was asked whether businesses like his would abandon ESG goals in the face of criticism from Republican leaders in the U.S., who recently gained control of the House. Critics have said companies should be more focused on profits and that ESG uses loosely defined, PR-friendly terms.
He was asked what if, for example, Republicans win the White House in 2024: Would companies like Bank of America alter course on ESG?
“No, because our company has been around for almost 240 years,” Mr. Moynihan said.
He added that CEOs view ESG goals such as combating climate change and making their workforce more diverse as integral to the long-term health of their companies. “They’re going to run the companies based on a view of how to create long-term value and I don’t think that gets derailed” by politics, he said.
Mr. Moynihan said universal reporting standards will pressure big companies and their suppliers to commit to goals that help society while also boosting profits.
“This annualized disclosure has to show year-by-year progress,” he said. “It now binds the company … By having it disclosed on a periodic basis and [making] it part of the official record, so to speak, you can’t walk away from it.”