Edelman Smithfield travelled to Edinburgh last month for the Global Ethical Finance Initiative’s Annual Summit that brought together more than 300 investors, policymakers, and business leaders to discuss the key sustainability themes shaping the financial services industry.
We know from the Edelman Trust Barometer that companies are under increasing pressure to act in a way that benefits all stakeholders to the fullest extent possible, as opposed to focusing on maximising financial returns.
But according to the Global Ethical Finance Initiative, “ESG stands at a crossroad. On the one side, its very existence has become a new political battleground. On the other, it has come to be viewed as a sticking plaster discouraging more comprehensive reforms of the financial system.”
This creates a conundrum for all stakeholders.
The following questions and themes emerged during keynotes, panel events and conversations:
1. HOW SHOULD INVESTORS CONSIDER PURPOSE AS PART OF THEIR INVESTMENT PROCESS?
An overarching theme of the conference was that, while there are parts of a company’s value that can’t be found on a traditional balance sheet, that doesn’t mean they can’t be quantified.
Investors have been comfortable with assessing a company’s intangible assets for decades. But challenges remain around how they can look “beyond the balance sheet” and measure purpose and mission as part of their long-term assessment of companies – particularly when meaningful data is often more qualitative than quantitative.
While some aspects of purpose can be reduced to hard metrics on a spreadsheet, analysing how economically sound, socially inclusive, and environmentally responsible a company’s actions are must become a greater part of how investors qualitatively assess its long-term value – especially given increasing evidence that suggests building purpose into business models (with clear targets) leads to more resilient companies.
2. IS CLIMATE-RELATED LITIGATION SET TO INCREASE?
Regulatory divergence and the increased politicisation of ESG suggest that climate-related litigation is likely to increase before it abates. The fear of being held legally accountable for sustainability-related claims is causing financial-services companies to publicly disclose less and less information – not least because the threat of legal action is now considered financially material.
One speaker highlighted a recent study that suggested a filing or an unfavourable court decision in a climate case reduced firm value by -0.41% on average, relative to expected values. As one panellist noted, “’Green washing’ is just as damaging as ‘green hushing’.”
Instead of retreating, panellists suggested that investors return to first principles, starting with their fiduciary duty. Climate change, destruction of habitats, and growing inequalities can have a material impact on a company’s ability to generate the profits that asset managers require to responsibly manage peoples’ long-term savings.
3. IS IT TIME TO RETIRE THE ESG ACRONYM?
Many delegates felt that the sustainable soup of definitions, acronyms and disclosures risks obfuscating the end goal. One panellist commented that the ESG rubric does little to protect the end investor when the average UK literacy age is equivalent to that of a nine-year-old.
Others argued that, as a risk framework, ESG still has a role to play in assessing potential investments and that it constitutes a very different and important process to understanding the potential positive impacts a company may have on society and the environment.
More broadly, the belief that all finance is ethical finance, and all investing is responsible investing, was repeated in almost every session. Multiple delegates argued for “prioritising ethics over ESG” and that profits are often a by-product of innovation and problem solving. As one keynote speaker argued: “Business ethics is dependent on the details of business practice. The problem starts when statements of purpose fail to reflect what happens under the bonnet.”
4. A CLIMATE CRISIS IS A HUMAN RIGHTS CRISIS – HOW DO INVESTORS ENSURE THEY ADDRESS BOTH?
As the physical risks of climate change become more apparent, so too does the human impact. Higher temperatures are leading to greater migration, which raises the risk of forced labour and human trafficking. But a “just transition” poses challenges too, such as human rights issues surrounding the mining of minerals necessary for electric vehicle manufacturing.
How can investors guard against social inequalities while trying to prevent environmental crises?
Regulation clearly plays a role. For example, the EU Taxonomy includes minimum standards on human rights, and TCFD places a focus on community impacts. Still, investors should consider the relationship between “E” (“environmental”) and “S” (“social”) factors.
Another underappreciated relationship exists between climate change and gender, especially in the global south. Rising temperatures disproportionately impact women. For example, droughts and declining agricultural yields increase the responsibility of women and girls to fetch water; the increased levels of malaria in developing economies due to rising temperatures cause complications in maternal and neonatal health.
One panellist argued that you cannot invest for climate change without investing for gender and offered a series of solutions for investors to consider. These included finding synergies between gender and climate funds and merging them, advancing gender bond markets, and supporting female entrepreneurs.
5. WHAT IS THE “NET ZERO” EQUIVALENT FOR THE “S” IN ESG?
What constitutes the “S” (“social”) in ESG is acknowledged to be broad and complex. There was much discussion around whether identifying one overarching goal would galvanise action to address social challenges, much as “net zero” has for environmental issues.
One suggestion was “zero slavery”, with one panellist citing that more than 50 million people globally were considered in slavery last year. Financial-services companies have a critical role to play in fighting and ending forced labour: they can monitor suspicious activity and ensure fraud processes are informed by modern slavery typologies; they can actively engage with the companies they invest in around their due diligence processes; and they can support survivors whose finances have been exploited, for example by offering survivor bank accounts.
Another suggestion was “banking for all” – the idea that everyone who wishes to can access a bank account. Around 1.4 billion people globally are unbanked - almost one quarter of the world’s population, according to the World Bank. Financial-services companies can meet this need by developing products and services that both help low-income demographics and generate profit. This, according to panellists, is the only way such initiatives will be sustainable in the long-term.
Imogen Gardam, director, London, and Alice Leaf, account director & global development manager for financial services, London