ESG has never been more popular as an investment strategy or more embraced by boardrooms and corporate management. It’s also never been met with such skepticism in today’s media. There may be a connection. If you review the headlines of the last year or so, it’s difficult to overlook these opposing trends.
On one hand, ESG investment products had another record year in 2021, with $649 billion of net flows into funds worldwide. ESG funds now account for 10% of global fund assets under management.
When it comes to governance, support for social and environmental proposals at the shareholder meetings of U.S. companies rose to 32% in 2021 from 27% in 2020. Sustainability reporting has become a must among top companies. In 2020, 92% of S&P 500 companies published sustainability reports, which is remarkable given that only 53% of the S&P 500 were reporting 10 years ago.
At the same time, media coverage – which seemed mostly positive up until recent years – has turned increasingly skeptical. Emblematic of the trend was a series of five “Streetwise” columns in The Wall Street Journal in January 2022. A few of the headlines give the flavor: “Why the Sustainable Investment Craze Is Flawed,” and “Sustainable Investing Can Change the World – and Sink Your Portfolio.”
But the Journal has been hardly alone in raising questions. Bloomberg Green writers called out MSCI, one of the leading providers of ESG ratings, for “rewarding some of Wall Street’s biggest banks even though they continue to lend billions of dollars to fossil-fuel companies.” Institutional Investor website published the work of two researchers who argued that “managers of ESG investments create false hope, oversell outperformance, and contribute to the delay of long-past-due regulatory action.”
The reasons for this turn in media coverage are complicated, but a few possible factors come to mind. For many years, ESG was an aspirational concept promoted by environmental and social justice groups. Adoption or application of its principles remained fairly low. To be sure, ESG has always had its critics, but their potshots meant little at a time when participation was limited. Now that ESG has gone mainstream, it has become a bigger and richer target for its critics, including the media.
But it’s important to note that many of the sources cited in the media are strong supporters of ESG. They’re calling out investment managers, corporate executives and rating agencies for what they see as inauthentic, misleading or misguided implementation. Some of them are worried that ESG has been “captured” by Wall Street, leading corporations and consultants.
However, complications remain over the SEC’s consideration of required climate disclosures. The agency has been sending letters to companies asking about their climate disclosure, one of the steps toward developing regulation. On March 21st, the SEC proposed a new role that would mandate such disclosure from public companies. Lobbying focused on this possibility of mandated disclosures has been intense, so it is not surprising that the media will continue to be drawn into the debate. Certainly, the continued high level of partisanship within the Beltway means the media will track the issues closely.
Though the media’s critical scrutiny seems to be growing in lockstep with the investment community’s and corporate world’s adoption of ESG, on balance, we believe this current dynamic represents a long-term positive for ESG. As is typical, some coverage may be off base or misdirected, perhaps even shrill in some cases. But the media’s delving into inconsistencies, blind spots or faulty logic will ultimately strengthen the case for ESG and provide long-term credibility for this discipline. Certainly, there’s no sign that the increasingly skeptical media coverage has in any way diminished the rising popularity of ESG investing or companies’ embrace of ESG initiatives or programs.
At the end of the day, investment managers and corporate executives should be aware that they’re operating in a different media environment regarding ESG topics than just a few short years ago. What the wave of media skepticism has done is turn a bright light on measurable impact. In the end, this skepticism may enable us to produce a better, more credible and systematic reporting structure.
And what does that mean for companies? The need to adjust their reporting strategy and communications accordingly. Look at the Sustainability Accounting Standards Board (SASB), whose standards provide a detailed framework for companies to guide the disclosure of financially material sustainability information with a level of rigor, primarily to their investors, and other key stakeholders. In a very short span of time, the adoption of SASB standards has skyrocketed – in 2019, there were 117 reporting companies, and this figure has grown to 1,325 reporting companies in 2021. SASB standards are valuable because they allow companies to examine their own unique situation via industry-specific, data-driven standards. They also uncover exposure to risk for companies and investors alike.
Our message: don’t wait for regulation from the SEC, get ahead of the skepticism and use the same rigorous standards that you bring to your reporting to your communications. Every participant in the chain of ESG implementation will need to make sure they’re being transparent in what they’re doing and communicating candidly about the effect their policies or actions are producing. They will more than ever be called on to lean into real data and metrics that prove real impact – not just generate rhetoric designed to improve an ESG rating.