ESG—environment, social, and governance—truly dead? Recent events would suggest so.
The U.S. Congress recently voted to cancel Biden-era legislation that would have fined energy producers for releasing high levels of methane, the climate warming gas up to 100 times more potent than carbon dioxide.
Two days before, the EU revealed a new “Clean Industry Deal” that suspended environmental due diligence requirements and exempted small and medium size companies from pollution reporting rules that they had only recently announced.
And, in January, a host of major financial institutions left the Net Zero Banking Alliance, a group only formed in 2021.
Green has certainly lost its sheen, but are corporations now off the hook as far as climate accountability goes?
Not entirely—especially because the financial community is highly sensitive to the risks inherent in their investments, including the environmental ones. But uncertainty is in the air, confidence in investments is low, and the financial community is looking for clarity.
For a clear demonstration of investor nerves, just look to the current rush on gold, the cost of which is up 12% this year. The price of gold is a proxy for confidence, something in short supply in this extraordinary period of geopolitical upheaval.
But there is another way to hedge against risk: cold, hard data. Sentiment may move markets, but to make money, investors need hard answers to basic questions: is this company profitable? How does it make its money? Will it continue to make money? As Warren Buffet said, “Never invest in a business you don’t understand.” ESG isn’t dead if its factors can actually reduce a company’s risk profile.
This point was emphasised by financial experts attending a recent panel discussion hosted by GHGSat. Representatives from MUFG, Huracan Technical Advisory and other City firms described a growing need to accurately quantify the environmental component of their investments in order to effectively manage potential risks and deliver returns.
Recent hold-ups notwithstanding, the direction of travel for climate regulation seemed clear to them: there will be more of it in the years to come. Today, ESG relies on voluntary market action. However, there is an inherent tension between the short-term profit gains from regulatory rollbacks, and long-term resilience gains from initiatives that drive more sustainable systems.
They also acknowledged the extraordinary fact-finding technology capabilities we now have at our disposal. This includes a growing constellation of high-resolution satellites able to pinpoint even minor methane leaks, or independently measure CO2 emissions for power plants, anywhere in the world, which provides independent data on greenhouse gas emissions. With these trends and capabilities in mind, their environmental information wish-list includes:
- Measured, rather than just modelled values–in part to help make models more accurate.
- Standardised data for consistency and benchmarking–emissions info being a useful measure of operational efficiency. We can add ‘independent’ too, as the group believed that company-provided information is not sufficient.
- Real-time data, as close to ‘now’ as possible.
- Information able to support top-line aggregate analysis and deep-dive investigations.
Space-based measurements can do all of this, so why aren’t they being used more widely? Established industries need time to adopt new ideas (cf. British manufacturing still coming to terms with ‘digital’). One hurdle to overcome is caused by the financial world being strictly regulated, though this can be an enabler, not just a blocker: once it is established that better quality data is available, and will enable practitioners to do their jobs better, it becomes impossible to defend the status quo of not drawing on available data. Change will require a fundamental market shift, influenced by both government and finance. But that change is coming, only now it will reduce uncertainty, not add to it.
Pundits have been predicting the end of ESG even before the war on ‘woke’ went hot. While the ‘social’ aspect will always be subject to the political weather, the ‘E’ part is increasingly bound to the rules of ROI. It is no longer controversial. It is common sense.
Learn more about GHGSat’s work with financial institutions here: https://www.ghgsat.com/en/markets/financial-services/
