Does it matter that Larry Fink is abandoning ESG?
It is perhaps ironic that at the start of London Climate Action Week the news headlines around sustainability are dominated by Larry Fink’s comments that he is abandoning the term ‘ESG’ as it has become ‘entirely weaponised’.
It’s hard to argue with him. Blackrock, which has placed ESG and ‘stakeholder capitalism’ at the heart of its investment strategy and brand (with Larry Fink’s annual CEO letter becoming a manifesto for the ESG investing movement), has recently found itself in the cross-hairs of political debate in the US and elsewhere.
ESG investing has been viewed by some (particularly sections of the Republican Party) as a failure of fiduciary duty as it has shut-out investors from asset classes (notably oil and gas stocks) which have risen in value since the start of the energy crisis. In the wake of that view, and ESG being branded ‘woke capitalism’, there have been significant outflows from ESG funds, despite the fact that net zero by 2050 is a legal requirement in the UK and some other countries.
It’s reassuring to note that Larry Fink does not say that Blackrock is abandoning the principles of ESG. Yet in reality the acronym is important shorthand for a mission of corporate and investor change which becomes more difficult to define, direct and measure without a wrapper that we can all understand.
So where does all of this leave us? Does it mean that ESG is ‘over’?
I was struck yesterday by comments made at the Green Finance Institute’s first Finance Day, held during the opening afternoon of London Climate Action Week. There, Nigel Topping (former UN Climate Champion at COP26) stated that part of the challenge with driving impact and delivering net zero is too many people ‘admiring the problem’ rather than focusing on solutions. He said that people have a tendency to want to demonstrate their knowledge of this deeply technical area when what we need is people to expose their vulnerabilities and look for ‘granular solutions’ to the problem of decarbonising the economy and building a greener society.
It is absolutely true that the whole area of sustainability, ESG, purposeful business (and numerous other descriptors for the movement) is laden with acronyms, technical detail and scientific debate and calculations. It can be impenetrable. Which is why terms like ESG (imperfect though it is) can be useful. Businesses we speak to often don’t know where to turn and what to do. Even FTSE 100s with large sustainability teams and baked-in ESG strategies still feel the heat.
It is a challenge that we have been examining as we look ahead to COP28 in November in the UAE. Why should business engage? Is the entire ESG movement now toxic? Should business stay below the radar given that any corporate sustainability and social impact initiative is generally greeted with suspicion and questions around green wash, blue wash, pink wash and any other shade of deception you can land on?
Under all of it there are a series of fundamental truths: The planet is warming, it will continue to do so to a point where we see mass disruption, migration, environmental damage and enormous cost and economic turmoil. Avoiding that is an absolute imperative for people, business and planet.
While UN conferences, climate weeks and global debates are critical forums for creating a sense of collective action and building fair frameworks for change, ultimately change comes down to individual consumers and businesses behaving differently: Decarbonising their lives and operations, reformulating products and services to be greener, accepting (in the G7 countries) that we need to consume less, and working together in harmony with nature and the planet.
Which comes back to Nigel Topping’s comment about granularity. The right ESG strategy for business is one that actually changes it for the better. Understanding what that is and how you make it happen is your ESG strategy.
Many people ask us why we (as communications, research and advocacy advisors) have skin in the game and relevance to that ESG mission. The answer is that we help business understand where risk and opportunity lies and we help them identify what a strategy should seek to deliver at a company level. As importantly, we help them gain the currency they need to make these major strategic changes, and that currency is trust.
Most businesses know they have to change, many have started to do so. Some will be forced too – note yesterday’s ISSB (International Sustainability Standards Board) announcement with the first two sustainability reporting standards being published, a movement that is essential to drive trust and transparency on how companies report. The challenge all companies face is that business is seen as ‘the problem’ in sustainability and climate change. That means its often not invited to be part of the solution-finding forums and international bodies, it usually has to fight its way in. Potentially leading to part of the challenge that Nigel Topping identified – a love for examining the problem and showing that you should be included.
In reality, change happens at ground level. For business that means setting a strategy and then securing trust to deliver it. Investors need to back the plan or they will divest, staff need to be ambassadors for it and make it happen, suppliers and customers need to buy into the plan and not let you down by operating at lower standards, media and activists need to be engaged so they don’t accuse you of green wash and politicians and regulators need to understand what you are doing and ensure that there is at the very least a relatively benign regulatory environment that creates a level playing field and encourages decarbonisation efforts.
Which brings us back to the start. Does Larry Fink abandoning ESG matter? On one level no, because the fundamental need to drive sustainable behaviour through business and investing remains and responsibility for doing that sits with individual organisations that need a plan and need to make it happen.
However, on a more macro level it does matter. Because it shows that standing up for ESG and building a corporate strategy around it is fraught with risk, even for a company as large and powerful as Blackrock. If they can be cancelled for trying to do the right thing (regardless of how far they are along the track to achieving that) then what does that say for the rest of us?
Which brings us back to COP28, London Climate Action Week and stakeholder engagement. If business is constantly seen as ‘the problem’ then business needs to step up, change the narrative and get permission to make the strategic changes that will drive net zero. These conferences and events provide energy and an opportunity to build a framework on which change sits. But fundamentally that change has to come from within each individual and business. Securing trust to make that change and then making it happen is the key to success.