The environmental, social and governance movement in business has lost momentum in the wake of high-profile greenwashing incidents as well as worries about the war in Ukraine and economic turmoil, but the problems ESG is meant to tackle are only growing, according to a new report.
Severe, destructive weather around the world in 2022 serves as a reminder that governments and businesses have responsibilities to reduce carbon emissions to combat climate change, and many are trying to stay on track despite a looming energy crisis, the Thomson Reuters Institute said in a special report on the backlash in the sustainability field.
“Speed is of the essence. The decision by the United States to approve the largest climate bill in its history is a clear indication of movement,” the report said.
Besides environmental issues, geopolitical events, notably Russia’s invasion of Ukraine, have shown the importance of staying focused on the social aspects of ESG, it said. Numerous companies pulled out of Russia after the attack in February, as they recognized the risk of damage to corporate reputation should they not take that step. Another major social risk is brewing in the U.S. over the issue of reproductive rights, said the report, called ESG Under Strain.
The Thomson Reuters Institute brings together experts from the legal, corporate, tax, accounting and government fields to analyze and debate business events and trends. Woodbridge Co. Ltd., the Thomson family holding company and controlling shareholder of Thomson Reuters, also owns The Globe and Mail.
The report lists forces that have worked against ESG following a number of years in which tens of billions of investment dollars flowed into companies and funds that promised to address major issues facing society, including such non-financial risks as climate change and discrimination based on race, sexual orientation and gender.
Politicians in Republican-controlled U.S. states have begun to boycott financial firms that exclude fossil fuel producers from their portfolios. Meanwhile, high-profile regulatory and legal actions against investment managers accused of greenwashing – making false or exaggerated environmental claims – have taken their toll on the field’s credibility.
In May, the U.S. Securities and Exchange Commission fined BNY Mellon US$1.5-million for misstatements and omissions about ESG factors that went into investment decisions for some of its mutual funds. That same month, police raided the Frankfurt offices of Deutsche Bank AG’s asset-management division, DWS, in connection with accusations of investment fraud related to greenwashing. The unit has been the subject of investigations in Germany and the United States.
“It is increasingly clear that companies will be held to account for what they say they are doing on ESG by governments and regulatory bodies,” the report said. “In addition, companies must align their operations to take account of burgeoning ESG rules and regulations, particularly in terms of disclosing what their carbon emissions are in the various countries in which they operate.”
That includes beefing up ESG-related skills at companies. Regulators are unlikely to look favourably on any managers or directors who are untrained in the field. Indeed, the SEC has established a climate and ESG task force within its Division of Enforcement, having prioritized examining climate-related business risks. “The talent war for ESG experts has begun,” the report said.