Fact-checking ESG criteria
ESG: an acronym much talked about in the world of business and finance. These three letters represent a virtuous concept – “Environmental, Social and Governance” – as well as a raft of misunderstandings and preconceptions. Among the red herrings and genuine impacts, the prejudices and inaccuracies, we decipher the reality of ESG criteria for you in this clear and straightforward fact check.
1. ESG means social and environmental governance / FALSE
Environmental, Social and Governance (ESG) criteria are very popular in the world of finance, where they are also known as “extra-financial criteria”. Essentially, these criteria “enable an economic player to be assessed outside the usual financial criteria of profitability, share price and growth prospects”, according to the French Financial Markets Authority (AMF) in France. This definition is widely shared by other markets. Specifically, ESG factors examine a wide range of practices in order to assess a company’s virtuous behavior – or otherwise – in terms of sustainable development, ethics and good governance.
The three pillars of ESG are:
Environmental criteria: waste management, energy consumption, resource conservation, reduction in greenhouse gases, water consumption, preservation of biodiversity and prevention of environmental risks.
Social criteria: safety and accident prevention, staff training, social dialog, equality and diversity, product quality and compliance, etc.
Governance criteria: respect for human rights, compliance, responsible purchasing, combating corruption, engagement with local communities and stakeholders, independence of the board of directors, transparency of information (executive compensation, shareholder relations), etc.
2. CSR, ESG – it’s all the same / FALSE
CSR and ESG criteria obviously share DNA, but they are not “twins”. ESG factors are actually used by investors to measure a company’s CSR (corporate social responsibility) performance in respect of its stakeholders: employees, partners, subcontractors, customers, investors, etc. ESG criteria clearly serve as indicators and allow an extra-financial analysis of the company. The term CSR is used by stakeholders other than investors.
3. The UN invented ESG criteria / TRUE
Kofi Annan “invented” and popularized ESG criteria in 2004, within the framework of the United Nations Global Compact. The former Secretary General of the United Nations appealed at the time to 50 leaders of large financial institutions to encourage them to incorporate ESG issues into financial markets. A year later, financial analyst Ivo Knoepfel wrote a report called Who Cares Wins, showing that incorporating environmental, social and governance issues leads to better business performance. ESG criteria were born!
4. ESG criteria – it’s just PR, more greenwashing / FALSE
Assessing a company’s ESG criteria is based on very detailed reports on actions carried out within the company in all aspects of “Environmental, Social and Governance”. This data is therefore quantifiable, measurable and verifiable. However, this data is not standardized and is interpreted by stakeholders using individual methodologies. It is a long way from greenwashing, as ESG criteria are published with complete transparency and are accessible to all stakeholders. The interpretation of extra-financial rating agencies is individual however. For instance, some stakeholders consider performance to be good and others bad based on the same data.
5. The criteria help guide investors looking to invest in responsible companies / TRUE
“Sustainable” or “responsible” investment is rooted in a company’s ESG criteria. These can be used by anyone as extra-financial assessment and analysis grids).
There are also different approaches to choosing an ESG investment.
The main thing is that the financial product offered by investors makes a positive contribution to the planet or people. ESG criteria act as catalysts in this respect to attract potential investors. And as an added bonus, they enhance the brand image of companies engaged in a CSR approach.
6. ESG criteria are the same all over the world / FALSE
Unfortunately, as yet there are no official, globally accepted standards for ESG criteria. ESG criteria depend on the company’s business sector and the methodological guidelines adopted by the assessor, whether an agency or an individual investor. Investors are increasingly coming together in more global initiatives such as the PRI (Principles for Responsible Investment), supported by the United Nations, and Climate 100+, which brings together investors committed to combating climate change, among others – progress is being made and attitudes are changing.
7. ESG criteria can change over time / TRUE
Yes, nothing is set in stone. Portfolio managers have full latitude to determine the most appropriate criteria or ratios based on impacts on the environment, people and society or according to the “maturity” of the subject and companies’ ability to engage.
8. Adhering to ESG criteria reduces a company’s profitability / FALSE
False. Why? Firstly, because an engaged brand, which takes into account the climate, the planet and its employees, has a better chance of winning over customers than a standard brand, especially in countries with a focus on sustainable development. Moreover, by setting itself targets for energy efficiency or resource conservation, the company becomes more thrifty and its management costs (water, energy, etc.) are therefore lower. Finally, “impact” companies also have a better chance of winning investor confidence.
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9. ESG criteria are only important to young people / FALSE
ESG criteria are above all extra-financial indicators created by and for the world of finance. They are therefore primarily aimed at investors, financiers and companies listed on the stock exchange and are still little known among young people, even though the latter have developed an environmental and social awareness that should make them particularly receptive to the importance of these criteria in the years to come.
10. ESG criteria are just a passing fad / FALSE
It may once have been seen as a fad for elite financiers, but over the years ESG criteria have established themselves to the point of becoming essential on many stock markets today. The share of investors in responsible funds therefore continues to grow. According to a study*, nearly $650 billion was invested in ESG funds in 2021 worldwide, compared to $285 billion in 2019. That represents €365 billion in additional investments in two years, demonstrating the strong market momentum.
11. Do ESG criteria mean that financiers will be able to save the world? / TRUE AND FALSE
Saving the world? Perhaps not, but taking part in the development of virtuous, more sustainable, inclusive and transparent practices: why not? The emergence of ESG criteria and responsible funds are pushing companies to make "good decisions". All around the world, we are witnessing a reallocation of capital towards renewable energies and the energy transition. Some banks are even stopping financing certain projects that are "too carbon-intensive" for their liking, in favor of "climate projects" or impact investments, particularly social or inclusive ones. One thing is certain: more responsible finance can contribute to a better world.
* Refinitiv/Lipper (nov. 2021)
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