ESG compliance by companies – all a farce?

 

Make no mistake, I have been a proponent of sustainable investing for over 20 years. Being a full believer in the importance of sustainability, I launched a responsible fund for the region 15 years ago, focusing on engagement for companies we invest in to improve their environmental, social, and governance (ESG), as well as responsibility standards.

Yet, as a senior investment professional, I cannot hide my continued disappointment as companies still try to “Bravo Sierra” investors with their glossy, ESG reports.

You can see right through them; and as these companies continue to claim accolades in the ESG area, the further from reality true ESG investing becomes. Box-ticking is more pronounced today than ever before.

Among the many issues giving rise to frustration and exasperation, is the fact that some companies are excluded from a broad ESG index, yet some of the other companies that are included should not even be there at all. The index contractors really need to come to their senses and realise the damage that is happening.

Company A is in one of the main global sustainability indices and was touted to be one of the “industry movers” that was even featured in the S&P Global Sustainability Yearbook 2022.

However, many industry ESG observers noted that in the year under review, the company reported a negative figure for the total Scope 3 emissions in its last financial year.

When a manufacturing company reports a negative figure for the total Scope 3 emissions, you need to read deeper. It was noted that their recycling process was deemed as having a negative emission.

Now, it’s certainly quite a stretch of the imagination for this company to determine that recycling is a negative figure in climate disclosures. There are clear protocols to calculating Scope 1, Scope 2 and Scope 3 emissions, which require step-by-step calculations of the Greenhouse Gas (GHG) emissions.

And there is certainly clear guidance on how to report emissions from recycling. It makes you wonder who their consultant was, to have come up with this green-washing spin.

Another contentious area is the definition of ESG itself. At the moment, there is no precise weighting given to each of the three categories. It was only recently that there have been methods developed to calculate some of the environmental standards.

All of these challenges have resulted in a wide array of companies and investment products claiming to be something they are not. Fortunately, the US Securities and Exchange Commission (SEC) is now going after fund managers who claim that they are ESG funds when they are not. These are big names in the industry who are now facing the US SEC’s wrath. This is definitely a positive wake-up call for the industry.

Finally, the last area of concern is related to the carbon credits or carbon offsets being traded by companies. Again, this is the same old issue of the rich using the poor to get richer.

A few US senators recently wrote to the Commodity Futures Trading Commission (CFTC) in relation to the issues surrounding carbon offsets/carbon trading.

The senators wrote that the purchase of offsets allows companies “to make bold claims about emission reductions and pledges to meet ‘net zero’, when in fact they are taking little action to address the climate impact of their industry”.

If you read some of the sustainability reports, you will cringe with disbelief. What these senators have highlighted is so accurate.

Ecosystem Marketplace reported that trading in the offsets market jumped from US$520 million in 2020 to US$2 billion in 2021. In theory, each carbon credit represents a tone of carbon either avoided or removed from the atmosphere.

But as many industry observers know, the offsets are obtained from questionable sources and there is a void in clear accountability or verification.

Is there a standard for tree planting projects that is marketed to capture carbon emissions? What is most troubling is that these carbon offsets or carbon credits purchased do not result in environmental benefits.

Not only are the poor corporate practices not being addressed, these corporates are also using their “dirty” money to buy their way out of making the necessary changes.

The US senators who wrote to the CFTC have also picked up on this issue of carbon offsets. They have asked for standards for the offsets market, which is currently “susceptible to fraud and manipulation”.

The senators aptly stated that “the offsets did not deliver the environmental benefits that were promised, constituting fraudulent investments that were a convenient and profitable way to market climate consciousness without requiring real action to reduce emissions”.

The US is not the only jurisdiction where these practices are being flagged. In the UK, their Climate Change Committee has warned that “without reform, the offsets market risked undermining net zero emissions plans”.

There is no doubt that every effort towards ESG compliance should be commended, just as it was when the International Financial Reporting Standards were released.

However, the bottom line is that everyone has to start making changes within each industry. There are no shortcuts or cheats, and you shouldn’t be able to buy yourself out. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.