It’s time to go ‘all in’ on ESG

The industry needs to take pole position and have zero tolerance for slip-ups if it doesn’t want to end up as a rule-taker.

If you wanted to be a cynic, you could say that ESG went from being a box-ticking exercise that only a few firms would do to a box-ticking exercise that all firms now do. Or, to put it differently, you simply cannot be seen not to care about ESG these days – it’s just not acceptable in polite society. Which is different from saying that everyone is putting their shoulder to it (or, cynicism aside, that no one is taking it seriously).

What can be said with absolute certainty, though, is that ESG is not going to reverse direction and reveal itself as a fad. That’s fantastic news. It’s also clear that there are a lot of people putting some serious thought into how to apply these practices and measure their impact. That’s great news too.

What’s less good is how hard it is to actually measure ESG and the vulnerabilities the current measuring systems have. Not to overuse the example of the UK’s Southern Water that opens our just-published Deep Dive on the topic, but when a company given a clean bill of health by an ESG benchmarker is then awarded a record fine by a regulator for damaging the environment, you know there’s still plenty of work to do.

For some of you, it might seem unfair to point fingers at those clearly committed to doing good. As DIF Capital Partners’ head of ESG, Frank Siblesz, told us: “It took over 500 years to develop accountancy standards and now on the sustainability side we’re expected to develop reporting standards in 10 or 20 years. There’s still a lot of room to improve.” It’s hard to disagree with that statement.

On the other hand, the pressure to improve (and quickly) will not let up. It’s also, arguably, fair to expect little-to-no margin of error when firms and their owners boast about their ESG prowess as a selling point or manage to score favourable loan terms on the back of ESG scores. If you’re telling people your shirt is whiter than most, you cannot be caught with a big stain on it.

But this commitment to ESG needs to come from the entire industry – and governments too. It’s abundantly clear in our Deep Dive that ESG does not crop up equally on every LP’s radar. For example, Chris Phillips, a spokesman for the Washington State Investment Board, made it clear that “the WSIB has not adopted a single position or practice regarding various ESG ratings or metrics systems”.

Anecdotal evidence aside, our LP Perspectives 2020 survey reveals that evidence and consideration of ESG only form a major part of the fund due-diligence process for 31 percent of LPs. For 50 percent of LPs, it forms only a minor part of due diligence. That’s perhaps not the answer many of us would like to hear, but it is the reality nonetheless.

And yet, getting ESG right has never been more important, especially as antipathy towards private capital grows in many parts of the world and its social licence to operate is being questioned, arguably as never before. The way forward, then, is an unflinching commitment to doing good, as opposed to just being seen to be doing good, as we wrote in our piece.

In fact, it’s in the industry’s best interest to take pole position on this. If it doesn’t, it risks finding itself increasingly at the mercy of outside forces. Worse, it risks being on the receiving end of rules that could make life very difficult, especially if there is a perception that the industry is not a good steward of these assets or that it is actively damaging the environment.

That’s a threat all stakeholders should take seriously.

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