Interest and institutional investment in support of environmental, social, and governance (ESG) prioritization has exploded in recent years.
ESG has quickly been propelled into a top-of-mind concern for c-suite executives, investment management teams, and many industry analysts point to the fallout from the Russia-Ukraine conflict as an indication that many of the new transnational ESG standards do not go far enough towards mitigating risks and providing clear guidance around responding to new compliance, disclosure, and reporting criteria that organizations face.
By the end of 2020, 88% of publicly traded companies, 79% of the venture and private equity-backed companies, and 67% of privately-owned companies had clearly defined ESG priorities:
- More than three in four (77%) small and mid-caps have a formal ESG purpose statement and nearly one in five have adopted standards such as the UN SDG, GRI, or SASB.
- More than one in four S&P 500 companies that conducted earnings calls for Q4 2020 cited “ESG”. This represents a 63% increase in ESG mentions from the previous quarter, and the highest number of ESG mentions in the last ten years.
- More than 200 companies have signed The Climate Pledge, a pact to reach the Paris Agreement goal of net-zero carbon 10 years early.
As of January 2022, global ESG assets exceeded $41 trillion—a notable increase over the $35 trillion from 2020, up from just $30.6 trillion as recently as 2018 and $22.8 trillion in 2016.
However, the lines between investor interest and activism continue to blur. Institutional investors, corporate leaders, and opportunistic startup ventures are all increasingly finding themselves under tremendous pressure to divest from fossil fuels, enact meaningful climate change policies, and traction towards delivering the net-zero commitments that have been touted by c-suite executives.
While sustainability-focused environmental concerns remain the top-of-mind concern for many executive leaders, it's time for organizations to adopt a more holistic approach to mitigating ESG risk that extends beyond the purview of environmental concerns.
Moving Beyond Environmental Standards to Support a More Holistic Approach to Mitigating ESG Risks
While climate change is the main focus area of most ESG accounting and reporting standards, investor concerns are diverse and encompass areas such as social justice which have not been as clearly codified into meaningful oversight standards.
Frameworks such as the One Earth Climate model, which describes pathways for carbon-intensive industries to achieve the net-zero benchmarks needed to meaningfully limit climate change to 1.5°C in the coming decades are one dimensional. Though this model has been adopted by the Net Zero Asset Owner Alliance network, it fails to support meaningful policy changes in areas outside of the environmental quadrant that is the focus of this model.
Meanwhile, definitions of ESG responsibility continue to evolve and geopolitical issues such as Russia’s invasion of Ukraine remain hot-button topics that have corporate leaders thinking long and hard about how to balance their investments with the activist whims of stakeholders. The landscape of ESG prioritization is expansive though nebulous with many new focus areas emerging around better infusing business development strategies with corporate social responsibility and sustainability initiatives.
Managing ESG risks requires organizations to rethink their business models, and commitments to the communities they serve and necessitates developing a more comprehensive view of the evolving threat landscape than existing ESG standards support.
Organizations have long grappled with the challenges of responding to conflicts and frameworks such as the UN General Principles on Business and Human Rights offer some insight but many firms are struggling to find the appropriate way to offer risk assessments and meaningful disclosures about their operations in affected regions. Corporate leaders are encouraged to see the value in providing meaningful oversight of their material conflict risks, and human rights due to diligence practices and responsible market entry guidelines.
Investors are paying close attention to the way firms respond to conflicts like the one unfolding inside Ukraine. They understand that the energy and food security risks posed by this ongoing situation are long-term issues that match transnational trends promoting greater sustainability and resilience.
Developing a more comprehensive approach to enterprise ESG risk management requires invigorating activities to respond to both the long-term structural risks posed by climate change policy as well as the shorter and mid-term risks posed by issues such as geopolitical conflicts, and human rights abuses and concerns revolving around social justice topics.
While it is certainly impressive to watch as corporate sentiments continue to evolve to encompass ESG prioritization initiatives, it’s time for more comprehensive accounting and reporting standards that adequately respond to the full landscape of concerns fielded by investors.
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