Blog 12.10.21

Celebrating ESG's late arrival

Late 1970s: Greenpeace activists trying to prevent nuclear waste dumping in the north Atlantic.

It was the early 90s and an Asian logging company was preparing an IPO in Hong Kong. I was writing a report for the Financial Times on a campaign to boycott the offering because it would encourage the destruction of ancient forests. 

Institutional investors were bemused. What has this got to do with us?  Who do these people think they are?  We have fiduciary duties. The business of business is business. Go away!

The annoyance still prevails three decades later with corporations and investors now writhing with an octopus called ESG (Environment, Social and Governance).  All these guidelines, these questionnaires, these demands.  Go away!

Looking back over 40 years in sustainability − mostly working with corporates − I remain astounded at how wilfully people can overlook signals of change.  Sustainability campaigners have long provided free forecasts on how social and environmental shifts will affect our lives and our businesses. So many of their predictions have come true, with formerly fringe ideas moving into the mainstream. 

In the late 1970s I became a very junior member of a new organisation called Greenpeace. We bought an old trawler and renamed it the Rainbow Warrior.  Because I loved enterprise as much as whales, I was appointed chief merchandising officer, selling Save the Whale badges by mail order and at rock concerts.

At the time, the UK government permitted the dumping of low-level nuclear waste in the north Atlantic. We campaigned against it, steering inflatable boats filled with very brave people under the concrete-filled drums that were rolled off the deck of a ship called the Gem.  This was a variation of the successful anti-whaling tactic where activists put themselves between the harpoon and the whale. The resulting publicity contributed to a ban on such dumping. Throwing nuclear waste into the sea? 

New normal

Unthinkable today, but then it was normal. The same goes for long-ago campaigns against slavery and child labour, workplace safety and food safety.

Pressure for corporate environmental responsibility gathered momentum in the early 1960s with the publication of Rachel Carson’s Silent Spring, detailing the mass death of birds and insects caused by indiscriminate use of agricultural pesticides, especially DDT (now tightly controlled).

The United Nations weighed in with the Stockholm Conference on the Human Environment in 1972; the 1987 Brundtland Report on the concept of sustainable development; and ultimately, today’s 17 Sustainable Development Goals (SDGs), calling for a world in 2030 with education for all, hunger for none, climate action and affordable and clean energy. Typical UN woke nonsense, perhaps.  But business takes them seriously and most leading multinationals report on how they do their bit to achieve them.

Then there are the UN-supported Principles of Responsible Investment (PRI), which commit institutional investors to incorporate ESG issues into their decisions, with more than 3,000 bodies signed up since 2006.  The use of “responsible” in the PRI initiative reflected the then-niche concept of Socially Responsible Investment (SRI), which excluded alcohol, gambling, tobacco and environmental pillage.  The ESG label has largely replaced SRI, reflecting progress by bodies like the Sustainability Accounting Standards Board, which underlines the financial, rather than moral, aspects of sustainability.

Used as an investment filter, ESG threatens the livelihoods of producers and heavy consumers of fossil energy.  The S and G components gain importance as campaigners target supply chains operating in parts of the world where corruption, child labour and modern slavery are rife. Social movements demand greater diversity and gender equality among employees.

Prostrate

Businesses need to acknowledge the breadth and durability of this campaign for social and environmental change. As with all crusades, you can take a view on when to resist, when to bend, and when to prostrate yourself. 

For example, our clients are besieged by questionnaires and competing demands from raters and rankers for highly detailed information about their businesses.  The solution: accept that the world is changing; identify the most influential ESG players; complete their questionnaires intelligently; ignore the rest.

ESG campaigners’ crowning achievement has been to co-opt a phalanx of financiers eager to set standards and to sell and trade ESG-labelled indices, products and derivatives (think Fink), with a sustainability reporting and verification industry, led by the Big Four accountancy firms, in their wake.  We have a massive spreadsheet with the various reporting guidelines and their required metrics.

ESG has arrived.  It now is an industry in itself.  The long campaign for the business and financial communities to take sustainability seriously has been won. You can choose to deny it, but you can’t say campaigners didn’t give you fair warning.

This blog first appeared as a sidebar in the Cedar Rock Capital annual letter to investors.

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Author:
Peter Knight

Chairman and co-founder

Clients:
IKEA, A Global packaging company, A leading global food company




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Congratulations to @Michelin, @Pirelli, @Bridgestone who scored highest in our #rubber #sustainability story assess… https://t.co/IBlAYxtW5W
@Context_Group – 1 year ago

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