ESG offers solutions, yet is now failure’s scapegoat

In a recent article in Board Agenda, London Business School’s Dr Ioannis Ioannou, puts his finger on why anti-ESG voices have been growing louder in recent years.

“The ESG label is used and abused by corporates and by investors for greenwashing purposes,” writes Dr Ioannou in ESG is not a ‘distraction’ (Board Agenda, July 25, 2022). Ioannis, an Associate Professor of Strategy and Entrepreneurship at LBS, is a leading advisor, and global voice on Sustainability Leadership and Corporate Responsibility. He argues that blaming Environmental, Social and Governance (ESG) is a convenient scapegoat for our collective failure, and the failure of our global institutions, to address the climate crisis.

Ioannis argues that as a global society we have never really been adequately focused on climate action, which is why powerful social movements like Extinction Rebellion and Fridays for the Future are now protesting in the streets across the world.

In his article, Ioannis looks back at the history of the development of the term. ESG was more widely used for the first time around 2004, appearing in a seminal report - and an associated UN initiative – titled, Who Cares Wins - Connecting Financial Markets to a Changing World. But when did we first know about the link between carbon emissions and global warming? Astonishingly, Ioannis reveals that it was way back in 1956 when Canadian physicist Gilbert Plass formulated the Carbon Dioxide Theory of Climate Change. More recently, the first conference of the parties (COP) was held in Berlin in 1995, 10 whole years before the term ESG even appeared.

“Therefore, even though there was awareness about the link between carbon dioxide emissions and global warming and even though we have been discussing it collectively since 1995, we do not have much to show in terms of actually reducing carbon emissions,” writes Ioannis.

Today, confusion surrounding ESG practices and metrics is not a distraction, but, as Ioannis points out, it is merely a reflection of underlying structural inefficiencies and ongoing, unsettled debates. “Critics are often quick to point out the inconsistencies, challenges, and the overall unreliability of ESG data. And in fact, they are justified to do so. We have a very long way to go until we arrive at ESG metrics that accurately and reliably reflect underlying practices and cannot be manipulated for greenwashing.”

“But let’s be very clear: the environmental and social challenges that we face today are not just a disclosure or measurement issue. In fact, to a large extent, the uncertainty and confusion surrounding ESG reflects ongoing and often unsettled or rapidly evolving societal debates,” he writes.

We should not lose sight of an emerging and dangerous practice by the political right, the ‘weaponisation’ of anti-ESG rhetoric. If, argues Ioannis, the ESG agenda had indeed been an obstacle to climate action, then the political right would have been the first ones to embrace it. “It is precisely because ESG in the longer-term, and when properly supervised and regulated, can have a positive impact on climate action that the political right, and vested interests, are so viciously fighting against it”.

It is the very act of calling ESG a distraction, says Ioannis, which is the real distraction from the real underlying cause of climate inaction. “This is not to suggest that ESG is where it should be. To the contrary: we certainly need more regulation of the ESG rating agencies, we need to urgently combat greenwashing in financial as well as product markets, and we need to swiftly move towards greater standardization of ESG metrics and to strengthen our disclosure and transparency requirements.”

Ioannis says that we should not use ESG as an easy scapegoat for our systemic and chronic failures to address climate change, and “the obvious failure of our global governance institutions to coordinate the necessary climate action”.

“Calling for a new type of grassroots multilateralism must be the ambition. The Bretton Woods and UN institutions emerged from WWII promoting peace and prosperity. The climate crisis presents catastrophic consequences for humanity and the planet. We, therefore, face a choice. Reimagine and rebuild global institutions now or be forced to do so after the ecosystem collapses.”