“A B C D ESG….”
You may have heard the term “ESG” thrown around in business conversations more often over the last year. Why? And what does “ESG” mean?
ESG is shorthand for “environmental, social and governance”. This includes, but is not limited to, things like sustainability, climate change, and diversity in corporate boards. It’s a lot of things packed into three little letters.
There are a few different pressures that have led to a perfect storm of now being the time for ESG goals to take the spotlight:
1. Governmental Prioritization. Europe has adopted Sustainable Finance Disclosure Regulations that are effective this year (2021), and the Biden Administration has indicated its interest in advocating for measurable ESG goals. Earlier this year, the Securities and Exchange Commission (SEC) appointed a Senior Policy Advisor for Climate and ESG and the SEC is currently seeking public comment on ESG reporting requirements for public companies (“material risks” to a public company must be disclosed, but currently there are no standards for what a material risk is when it comes to ESG). States also have carrot and sticks related to ESG, though the label “ESG” hasn’t been used in the past. For example, many states incentivize clean energy upgrades through PACE (property assessed clean energy) financing and in Michigan the state housing development authority has long included green building as a priority, and has required green building standards in its most recent Qualified Allocation Plans (QAPs) for the competitive 9% Low Income Housing Tax Credit (LIHTC) application process.
2. Social Pressure. 2020 was a year for the history books in multiple ways. The social protests sparked by the death of George Floyd (and Breonna Taylor and Ahmaud Arbery, among others), corporate reports that companies with diverse boards including women and people of color, and concern that executive pay has grown while inflation-adjusted wages for lower wage earners has stagnated or decreased, and the change in what the workforce will accept after a year of quarantine has made it clear that corporate governance and DEI (diversity, equity and inclusion) are not only moral imperatives, but are also critical to a company’s bottom line.
3. Public Health/Environmental Concerns. Between a global pandemic, a rise in extreme weather events due to climate change, and poor health outcomes such as asthma and depression due to environmental factors (VOX, SOX, vapor intrusion, heavy metals & PFAS in the groundwater, etc), there has been an even bigger focus on sustainable construction, healthier indoor air quality, and alternative, safer construction materials, as well as built environment amenities such as community gardens, workspaces and incubator spaces for neighborhood businesses.
4. Investor Interest. Both institutional and individual investors have segments interested in social impact investing and will pressure companies in which they are invested, public or private, to pay attention to ESG matters. A recent, high profile example is that of a small hedge fund nominating 4 seats to Exxon’s board and gaining 3 of those seats with the support of institutional investors. The hedge fund’s goal is to force the company to do more with respect to the company’s climate change initiatives. Furthermore, many sources of financing for private companies may include a mission-based investment strategy addressing one or more ESG goals.\
These four forces have meant an incomparable acceleration to already growing concerns about the effect of climate change, sustainability and corporate board diversity. While ESG has been a growing area for close to a decade, with a regulatory reporting framework, the widespread societal changes instigated by events of 2020 and more attention to sustainability and corporate responsibility by both individual and institutional investors suggests that ESG has become mainstream.
