ESG Investing is a new market trend that has gained much momentum among ethical investors, multi-billion dollar corporations, mammoth private equity firms, and lately, the Securities and Exchange Commission (SEC) and International Sustainability Standards Board (ISSB).

ESG—Environmental, Social, and Governance—revolves around a more stakeholder-centric approach to doing business, namely establishing ethical and eco-friendly corporate policies that provide transparency for investing parties.

Much more than that, though, ESG moves beyond simply analyzing the environmental impacts of corporate operations. While on the conscious level, the concerns of shareholders remain the same, thus the increased focus by ESG on greenhouse gas emissions and resilience against physical climate risk; three pillars talk about how ethical an organization is (i.e., human rights issues, fair wages for workers, safe working conditions, etc.) and how it is being led by whosoever or whoever is in charge (i.e., operational transparency, leadership accountability).

ESG investing skyrocketed during the COVID-19 pandemic, and many thought it would be a flash in the pan the next fiscal year. However, ESG has become the stuff of regular business discussion today, even as pandemic-induced turmoil continues to grip the global economy. According to Bloomberg Terminal, ESG assets will reach a $53 trillion valuation by 2025, accounting for a third of AUM. For 2023 and beyond, the bottom line is that ESG is part of the regular course of business discussion.

There is enough interest in ESG, but investor faith in companies that claim to be ESG-oriented is rapidly fading. Since there’s no standardized mechanism for measuring and reporting their commitments, there cannot be a system or a process to vindicate the thousands of companies that have rebranded as ESG-oriented.

Investigations into Goldman Sachs Assets Management (GSAM) and Deutsche Bank for their claims led to speculations that fund managers were relabeling their products to cash in on the trend without doing any heavy lifting, leading to what many call the ESG backlash.

Investors are finding new ways to verify the authenticity of stocks labeled “ESG.” Using the AlphaPro platform, we delved deeper into how ESG trends have shifted with investors and companies to fulfill this growing demand for transparency.

The Forces That Are Changing ESG Investing

The intentions behind ESG investing are altruistic: to influence the mainstream finance industry into funneling private capital to address global challenges. However, leading private equity firms have recently been accused of manipulating investors through various misleading schemes to cash in on the trend. Potentially the ignitor of the ESG backlash era, the SEC’s formal charge of GSAM revealed how brokers are exactly accomplishing this:

“The order finds that GSAM’s policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio before the selection; however, personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which was often conducted differently than what was required in its policies and procedures. GSAM shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the fund’s board of trustees.”

                            —Press Release

Without admitting or denying the SEC’s findings, GSAM agreed to a cease-and-desist order, a censure, and a $4 million penalty.

Greenwashing is a buzzword widely used to describe incidents in which organizations use misleading or inconsistent information to present themselves as more environmentally responsible than they are.

German police searched Deutsche Bank’s headquarters in May after a consumer association sued the bank for allegedly greenwashing investment funds in its DWS subsidiary and, more specifically, for deceptive practices in advertising a fund’s environmental rating. Prosecutors cited “sufficient factual evidence” to dismiss CEO Asoka Woehrmann.

These investigations of major financial institutions have increased the demand for vetting processes in companies ascribing ESG to their policies. Even as the engagement of the SEC and ISSB brings more authoritative figures, the investors remain responsible for determining whether a company or an ESG fund is truthful in its intentions.

With no official system to verify an organization’s commitment to its ESG policies, many shareholders and investors are taking matters into their own hands by fact-checking. From reviewing how a company is rated publicly as “ESG-friendly” to the supply chains used and even the processes regulators utilize, there is a many-faceted aspect of an organization that investors are now analyzing to strengthen their responsible investing criteria. Using AlphaPro, we dove deep into what stakeholders and investors look for in a company’s ESG claim and, more importantly, what they miss.

Important ESG Developments & Trends

Cutting Supply Chain Emissions and Reporting Them 

It is an understatement to mention the criticality of supply chains in ESG since they encompass over 90% of a company’s carbon footprint. Most of these emissions originate from sourcing; therefore, spending management becomes a pertinent concern when organizations prioritize supply chain sustainability. Thus, while ensuring strategic sourcing of more- or lower-emission footprints of partners or products, reporting and publishing, among other important requirements for upholding transparency with the stakeholders, matter more. And this may be achieved with the unstoppable embrace of digital transformation, intelligent spending, and business network technologies by more and more businesses. 

The right technology, deployed in place, can help companies gain better visibility across their supply chains and partner collaboration, thus better helping them assess and evaluate the business’s progress toward its ESG goals. For instance, network-enabled insights monitor carbon-tracking data, influence trading partners, and enhance business operations and strategic decision-making. Leadership can also monitor and tap circular opportunities in product lifecycle design.

As ESG investing trends continue to grow in importance for a company’s survival in our volatile marketplace, next would be the requirements for compliance and auditing, which makes digitization necessary to scale resources and outcomes organization-wide. Companies that have made digital transformation a part of their business are already found to be fiscally advantageous. A study by IDC found that 680 manufacturing companies that were “digitally mature” and concentrated on sustainability outperformed those not in either category.

Ecological Viability and Functional Durability in Biodiversity

This is included in the scope of ESG’s three pillars: reducing and fighting corporate greenhouse gas emissions. Known facts attribute greenhouse gases to factors that accelerate climate change and affect most types of biodiversity—varied life on earth or in a specific habitat or ecosystem.

Climate change’s immediate effects include frequent fires, storms, and drought outbreaks. With this comes a gamut of cascading effects that may lead to social problems and governance crises-from youth disillusionment to involuntary migration, livelihood crises, geoeconomic confrontations, resource contestation, and more. The impacts of climate change on biodiversity are rarely constrained; instead, companies are increasingly going beyond tracking reduction and reporting statistics.

Beyond companies’ actions in response to stakeholders’ social concerns over corporate GHGs, this also presents a self-serving business interest in maintaining biodiversity and curbing emissions.

For that matter, biodiversity attrition can also seriously under-engage a firm’s bottom line. Most businesses are now so dependent on the ecosystem, including timber and natural pharmaceuticals and services, from pollination to air quality regulation, that more than half of the world’s GDP ($44 trillion) is somehow traceable back to natural resources. The figure is sobering, reflecting the economic anarchy that could result from continued biodiversity loss. In other words, if no effort at mitigation or reversal of human impacts on biodiversity takes place, the resources on which most companies depend will become scarcer, thus costing more, being more challenging to reach, and unavailable.

Putting Money Into a Net Zero Business Plan

The most significant change was one of the biggest: from one year ago when the greatest number of countries with governments and large enterprises worldwide pledged to reach net zero emissions by 2050—a future that promised to be filled with corporate fossil fuel and GHG metrics near or at 0% renewable energy. Still, corporations have another quarter century to reach this date, and it is often lacking in interim cuts in emissions or direction on how to mitigate indirect supply chain emissions.

Stakeholders and investors become aware of this gap and demand that organizations present specific, near-term plans for measuring the progress of corporate ESG commitments and goals. The long-term stakeholders will require more than long-term commitments; rather, they will require credible, achievable near-term signposts along their decarbonization journey from governments. This will virtually eliminate any space that the companies can use to promise unrealistic ESG initiatives with no follow-through in mind.

There is a sense of stakeholder pressure to act sooner rather than later to address the consequences of impending climate change. Scientists working on a report for the UN’s Intergovernmental Panel on Climate Change discovered that reaching net zero global emissions by 2050 will be necessary to avoid some of the worst effects of climate change, effects that the UN Secretary-General described as “a code red for humanity.”

This has focused shareholders’ minds on even more climate-related natural disasters and how prepared corporations will be in the aftermath of physical climate occurrences. Corporations should do their share in reducing GHGs but should not forget to arm themselves against the climatic consequences brought about by GHG emissions.

In broad terms, these demands summarize the stake-holding expectation of investment, which aims to hold companies accountable for their promises and fight against market greenwash.

Companies in virtually every industry are responding to those calls. According to the Environmental Finance Bond Database, the total issuance of sustainable debt was a record $960 billion last year, up 61% from 2020. That is a very big number that includes green bonds, social bonds, and sustainability-linked bonds and reflects the growth, if not acceleration, of companies and governments financing a transition to net zero business models and economies as they further their ESG agenda.

Transforming Workforces

There will be huge changes in terms of labor and skills requirements toward 2024, with the goal of reaching net-zero economic standards. Just to give one example, the gap in the workforce, and much more precisely in the mining industry of E&I, was during the era of COVID-19. Combined with further trending adaptation towards digitized ways of working, professionals need to accelerate and expand their respective competencies to fill these newly indispensable jobs.

Training will also play an essential role in building the workforce for these new jobs and roles, as most of the estimated 59% of all envisioned job openings within the energy transition from 2025 through 2050 are expected to be higher-skilled, consisting of technicians, trade workers, professionals, and managers. ESG rules and regulations will compel business owners to publicly declare their commitment to valuing personnel, treating their employees fairly, and ensuring conditions that lead employees and those along the supply chain.

In a tight labor market and restricted skilled migration, the demand for the skilled workforce will peak in the competitive ‘war for talent,’ where the worker picks the job offer that best suits his or her individual preferences. For organizations focused on change involving ESG investing trends at its core, in addition to structural changes, attention to upskilling employees, sustainability programs, and the organization’s culture will become the need of the hour. This, therefore, requires profound knowledge of cultural realities through well-articulated aspirations that support sustainability and drive behavioral change.

Accelerating clean energy will spur new demands for skills in most sectors of the economy. Consequently, companies will experience increasing recruitment pressures, especially in securing qualified candidates for the increasing number of skilled professional fields under the expanding green economy. Almost all renewable energy firms are already struggling to get sufficient qualified applications or experience for open positions. Bottom line: From now and going forward, expect business leaders to focus on securing a premium workforce to lead in the race to a net-zero end.

Embracing ESG Investing Regulations

As new jurisdictions on ESG stock labeling, trading, and selling emerge, C-Suite leadership is taking steps to ensure that all of their company operations accurately reflect their commitments. Honing in on the “G” pillar, boards and committees are being devised to better understand and oversee how well their organizations are positioned for the goals they have set, define governance structure and policies, and then provide a framework for overseeing accountability and strategic focus.

Respectively, executives are ensuring these efforts are made public to stakeholders. According to Deloitte, there was a 14 percent increase in “the percentage of S&P 500 companies disclosing in their proxies the primary committee(s) overseeing ESG relative to last year.”.

This is likely because companies are maturing through an ESG maturity model that is more integrated into their core business strategy and risk program and defines how the board oversees such ESG efforts. More than twice as likely as other constituents not to have publicly disclosed the ESG committee, the 35 new additions to the S&P 500 this year suggest that formalizing an ESG governance framework is contingent upon the company’s size and what is expected within the market.

Along with this increase in committees and boards focused on ESG, corporate leadership is adopting a collection of best practices in their work. First, many companies report that an entire board and committee or several committees are involved in overseeing ESG activities, though most rely on their nominating and governance committee to provide primary oversight.

As programs and policies evolve to define for companies how they will address the pillars of ESG, specific boards or committees are assigned a specific ESG issue to ensure diverse accountability, enabling boards and committees to execute their fiduciary responsibility effectively.

Several other organizations have also named or renamed their nominating and governance committee’s names to be more transparent with stakeholders regarding the broader committee’s purpose.

Collaboration in ESG Reporting

Earlier last year, the first move to “inject sustainability at the heart of the investment process” and eliminate greenwashing arrived in the European Commission’s Sustainable Finance Disclosure Regulation, or SFDR. However, SFDR implementation delays have muddled the waters for asset managers’ already adversity-burdened ESG disclosures going into 2022, providing an opportunity for notably manipulative trading tactics.

This absence of reporting standards for ESG metrics implies the highest influence on companies, especially where investors tend to compare data on ESG progress, risks, and opportunities.

A single framework to assess a corporation’s commitment, as regulations on reporting requirements and disclosure slowly develop to define how corporations can and can’t address ESG and comparable data become more popular, will benefit investors in understanding the various ESG factors and metrics shared with asset managers.

With shifting regulations, so will the ESG data companies, which will need to track, report, and leverage to peak investor interest. This then calls for businesses to establish a collaborative and centralized reporting model internally and for all personnel involved in developing an ESG report to know their role.

That, in turn, provides mechanisms by which companies can communicate how education initiatives across teams will etch into ESG committee board members that they require access to the right reporting tools and, most importantly, clear and consistent lines of communication. Everyone who may sit around that boardroom table—and isn’t an ESG leader themselves—is in on the part of playing their role in maximizing the benefits of being a transparent company.

More importantly, C-suite executives at the top of the organizational structure would want all relevant teams to participate in the reporting process. Groups such as the UN Global Compact CFO Task Force exist to serve this end by offering companies that wish to align their sustainability commitments with credible corporate finance ESG strategies. As an added advantage, groups of this nature offer forums where advisory and idea-sharing are carried out in a peer-to-peer environment.

The Return of the ESG Backlash

False corporate claims of transparency around ESG are once again exposed. To be sure, as a recent Skadden article just published discloses, shareholders are still bringing derivative, and securities suits challenging claims that companies have failed to meet stated commitments to effectuate established ESG goals. To date, the initial U.S. litigation challenging the accuracy of disclosures related to corporate commitments toward diversity generally has been dismissed. Still, not deterred, shareholders have resorted to seeking access to corporate books and including board materials to bolster the claims made in amended complaints.

In addition to this shareholder oversight, the U.S. Securities and Exchange Commission (SEC) has implemented regulations that will now require stronger ESG disclosures. The agency has been bringing enforcement actions against several companies’ ESG-related disclosures and initiatives while those proposals are pending.

As pressures for more robust ESG policies and disclosures build and shine a spotlight on U.S. companies, some ESG industry leaders are pushing back against accusations of inauthenticity. In fact, bringing an ESG claim is not without peril for the plaintiff, either.

For example, the French oil company TotalEnergies denies an NGO environmental organization that its greenhouse gas emissions have been miscalculated. The company filed a motion to withdraw the published claims and requested the imposition of a sanction on the NGO and its supporting consultants. When companies consider allegations against them false or exaggerated, they may move beyond a forceful defense to dismissal.

AlphaPro: Keeping Ahead of the Curve

With new regulations constantly popping up to combat greenwashing, misleading schemes, and other ESG risks brandished by private equity funds, keeping up with new investment trends and disclosure standards is essential to the longevity of public and private companies’ businesses. This need demands a tool continuously aggregating leading industry information but cutting through the noise distracting you from the answers you need. AlphaPro is that and more.

Our innovative market intelligence platform lets our clients access over 10,000 content sources–brokers’ research, company documents, and much more–ensuring our users have everything they need.