Should ESG be the savior of the planet?

The Taiwan government has shown it is strongly supportive of environmental, social, and governance (ESG) investing's core strategies for the development of sustainable finance through the Green Finance Action Plan 3.0 and the 2050 Net-Zero Pathway.

Just a few months ago, the Taiwan Stock Exchange (TWSE) introduced a new ESG reporting mandate for listed companies on both the TWSE and the Taipei Exchange (TPEx). Companies are required to publicly disclose relevant information regarding their ESG practices and development status on an annual basis.

It is expected that, in the long run, the disclosure mandate — in combination with the sustainability development road map launched by the Financial Supervisory Commission in March 2022 to curb greenhouse-gas emissions — will strengthen investor confidence and attract additional domestic and foreign investment.

So, to be frank, the disclosure requirements in Taiwan do not require an annual ESG “thesis” and it is clear the disclosure mandate will evolve over time.

In a previous opinion piece, I noted some of the issues facing ESG in the global arena. These include a limited data pool, the lack of a single regulatory framework, disparity in terminology and definitions and even the suggestion of “greenwashing” of public reports.

These issues are not just creating some "noise" but it could be argued that ESG itself is in the midst of a maelstrom of controversy. The basis for this piece is a July 23 edition of The Economist, a publication I have long admired, but I have some real issues with this particular edition and its focus on ESG.

We’ll start with the front cover, a “pair of scissors” cutting into the ESG acronym accompanied by the words, “Three letters that won’t save the planet.”

SOS

Now, I’ve been writing about ESG for some time now and, while I am not employed as a sustainability officer within a listed company, nor am I compensated for my positive and optimistic view of ESG, I have never heard or read of ESG as some savior or panacea for the world's many woes. Sure, a dramatic headline and front cover get attention and sell copies, but to subscribe to ESG some mystical power of saving the planet seems far-fetched even to my imagination.

So, let’s ignore the dramatic cover and proceed to one of the articles. Let me be clear that I am not a scientist and I have long left science up to my older sibling and been comfortable in my English, History and Humanities space.

I’m a former lawyer and a quick glance at the end of this article will explain more about my background. I come at ESG from a different angle to the writers of the articles in the edition in question. I am highly respectful of scientists and grateful to learn from them — I’m just not one of them.

In the “Leaders” section, it describes ESG as failing to make capitalism work better and instead alleges that it has “morphed into shorthand of hype and controversy.” We also note the first reference to “greenwashing.”

Greenwashing is a misrepresentation of a product, service, or investment, making something appear to be more sustainable than it actually is. The article gives the names of some major global financial institutions that are under investigation for such practices.

The article then describes ESG as “an unholy mess that needs to be ruthlessly streamlined." Two thoughts here. Firstly, if greenwashing is occurring and major global financial institutions are proven to be involved, then it is up to the financial regulators and governments to name, sanction, and fine such activities and institutions.

If you want ruthlessness, then stamp out the fraud and corruption surrounding greenwashing. Secondly, ESG is, in many ways, still developing, finding its way in each country. “Ruthless streamlining” of ESG smacks of being extreme, and is there another agenda?

Breaking it down

Just because ESG does not, yet, come neatly packaged in a globally adopted 100-point questionnaire does not mean it has no purpose, or that investors do not wish to see such measures in place in those companies in which they place their cash.

The article writer addresses the “S” in ESG first and notes that one of its issues is that “individual firms will make different decisions about their social conduct.” If we are talking about ESG being applicable to all listed institutions it is ludicrous to suggest, at this stage in its evolution, absolute commonality within all listed institutions. There will be variances, and the commonalities and variances will have to be “ironed out” over time.

“G” or the “art of management” is described as too subtle to be captured by box-ticking. Britain’s listed firms come in for a thumping with the comments that these firms have "an elaborate governance code — and dismal performance."

Well again, get your house in order. Enforce legislated governance and accountability. Consigning ESG to the “naughty corner” because of poor governance simply does not make sense to me. If ESG forces improvement in governance, then we will have achieved more than expected.

“E” then comes in for its criticism. “E” apparently is far too “all-encompassing” a term as it includes “biodiversity, water scarcity and so on." “E” apparently should be limited to “emissions”, and in particular “those generated by carbon-belching industries.”

In my humble opinion, this is too limited and short-sighted.

House cleaning

Yes, carbon emissions are a major conundrum facing the globe, but the global populace is not just concerned about carbon emissions. Even if you don’t subscribe to the arguments of climate change, I am willing to believe that you are concerned with other environmental related issues, such as clean water, plastic waste and “so on.”

Again, restricting “E” to carbon emissions smacks of a back door approach to shutting down ESG just because it seeks to tackle a plethora of issues.

I am reminded of a factual story about an endeavor to eliminate the humble sparrow from one country on the basis that it consumed agricultural crops. The sparrow was indeed eliminated (at least for some time) but its absence then illustrated its importance in keeping down the insect population, which did far more damage to agricultural crops than the sparrow. A balanced view is the better view in my opinion.

The article in question then ends with the statement that “it is government action, combined with clear and consistent disclosure that can save the planet, not an abbreviation that is in danger of standing for exaggerated, superficial guff."

That aligns with other commentary, within the same edition of The Economist that espouses the view that ESG sounds like a “pious mantra” and not “a force for change. Again, I would never have subscribed to ESG as the savior of the planet.

Change the abbreviation if you must. Hasn’t it already overtaken, to some degree, CSR, or corporate social responsibility? And I have no argument with the need for ongoing government action and greater clarity and disclosure — all of which can be achieved in the long run.

As I noted at the start, the ESG world continues to come under extensive scrutiny. However, I continue to maintain, that regardless of the international noise, Taiwan, at least, sees positive benefits in ESG.

Should change be needed in the approach to ESG globally, then propose the changes and have them robustly debated, and a better model duly adopted. Meanwhile, I have no doubt that Taiwan will carefully evaluate and implement those changes it views as necessary provided there is a benefit to Taiwan.

Our member, Paul Shelton has a 30-year history in banking, working as head of Legal & Compliance and MLRO for the Asia Pacific branches of major international financial institutions in Japan, Singapore, Australia, and Hong Kong. He is also experienced in working with financial regulators across the Asia Pacific and provides consultancy services to Taiwanese financial and non-financial industry associations in all aspects of Compliance, AML/Sanctions, and Governance. He resides in Taipei.