The below letter was drafted in response to an article in The Economist: “ESG should be boiled down to one simple measure: emissions” (July 21st 2022). An edited version was published by The Economist on August 11th 2022 and is available here.

Nathan Fabian, Chief Responsible Investment Officer

The Economist’s recent article “ESG should be boiled down to one simple measure: emissions” (July 21st 2022) makes a number of misguided suppositions around the interplay of climate, society and investment, concluding that ESG investing is an outdated and flawed idea – a concept which should be dropped in favour of a focus exclusively on emissions.

ESG exists because efforts so far to price the planet’s boundaries and social institutions have been too little and too late to make a difference. Corporates and investors alike have spent the best part of 20 years worshipping at the altar of carbon markets only to find that politics gets in the way of a sufficient price and sufficient coverage to meet climate goals. As a result, investors have had to evaluate emissions (and other ESG factors such as board competency, transition plans, and stakeholder impacts) and trade on the risk of future prices and regulation to prepare for the economic transition ahead. Discarding ESG as an imperfect alternative to focus solely on emissions takes markets and governments further from where we need to be on reducing emissions - not closer.

ESG provides a framework to assess the interconnectedness of Environmental, Social and Governance issues in a way that better reflects policy and economic realities. For example, the economic transition required to reduce emissions is also an inherently a social transition. Take the gilet jaunes protests in France, where an increase in fuel duty (nominally with the aim of curbing carbon emissions) was a major factor in months of disruptive civil unrest. No government, investor or business can consider the pathway for policy reforms without considering their wider ramifications and the volatility that may result for markets. The “E”, “S” and “G” must be solved together.

“ESG” is not one thing, but rather a method for considering issues beyond traditional financial data, which still entail financial materiality. This is not to say that we shouldn’t be cognisant of the limits of ESG as a tool – we should. But separating climate from its impact on society and its implications on corporate governance marginalises the issue and risks underestimating the breadth of the response needed to truly solve the climate crisis. Debate is vital, but for this response to be effective, we must accept the scale and intricacy of the challenge. Failing to do so would repeat the mistakes of the past and waste time we simply do not have.