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If you say the word “green activist” to a corporate executive, Greta Thunberg may spring to mind — and provoke fear. Today, however, there is another force to watch: robots.
Consider an artificial intelligence-enabled platform called “ClimateBert”. This was recently created by Swiss and German academics to parse the accounts of 800 businesses backing the “task force for climate related financial disclosure”, principles pioneered by Mark Carney, former Bank of England governor. It sounds (and is) geeky. Not so the message: “ClimateBert comes to the sobering conclusion that the firms’ TCFD support is mostly cheap talk . . . [since] firms cherry-pick to report primarily non-material climate risk information,” the academics say. In plain English: they have uncovered greenwashing.
This is embarrassing and depressing for the champions of environmental, social and governance principles, such as Carney. Last year, ESG boomed so dramatically that Bank of America estimates that around 40 per cent of all investible assets carry that tag.
But now there are signs of an emerging backlash. One is that Danone’s ESG-loving boss was ousted. Another emanates from a column denouncing ESG by Tariq Fancy, former head of BlackRock’s sustainable investing unit.
“Wall Street is greenwashing the economic system,” Fancy declares, decrying the idea “that pursuing social good [is] also good for the bottom line” or helps the planet; instead he thinks ESG will distract governments from badly needed policy reform.
However, there is another way to frame this backlash: in the long run, the criticism from Fancy — or ClimateBert — might actually save ESG, rather than cripple it. For if anything is ever going to make ESG more than a passing fad, it is that scrutiny will force higher standards. And it is striking that the 21st century information revolution is sparking this oversight at a much earlier stage in the innovation cycle than for earlier financial fashion trends, such as the launch of derivatives or securitisation.
A decade ago, it was virtually impossible to assess what any single company was doing to the environment, or vice versa, let alone track 800 of them. Such information that was available was treated as a footnote to corporate accounts, or “externality” to economic models, and third-party information was scant.
Today, the data picture is still foggy. Green reporting systems (like TCFD) have emerged. But there is a plethora of competing standards. And while the International Financial Reporting Standards Foundation has just announced consolidation plans, this will take time.
But it is remarkable just how much data already exists. More striking still, a global army of entrepreneurial geeks is racing to create platforms, many of them open source, to parse this information. This roster includes establishment names like Goldman Sachs, start ups like Arabesque and academics. Two examples emerged this week: a team at Cambridge university is building an open-source system to track ESG risks in sovereign bonds; their counterparts at King’s College London are scanning companies’ AI platforms for hidden ESG problems.
This makes data access more democratic at the same time that new digital platforms are also enabling once-powerless voices to unite in protest more effectively. The #MeToo movement shows how this can, sometimes, change power dynamics. And while grassroots protests can be capricious, the combination of these trends is changing the psyche of corporate boards.
So while corporate leaders used to view ESG issues as an optional “nice to have”, they increasingly feel that it is dangerous to ignore them. ESG blind spots can create reputational damage and cause companies to lose employees, customers, investors or regulatory licenses. Talking about it is a tool of risk management for corporate boards.
Does this make the ESG movement hypocritical, as Fancy suggests? Yes, in some respects. Nobody should be fooled into thinking that Wall Street is embracing ESG out of virtue; nor that it can be a substitute for government action.
But I disagree with Fancy on one point: just because ESG is about virtue signalling and risk management, does not mean it is meaningless. On the contrary, the very fact that company executives feel the need to “signal” ESG virtues shows how the interplay of digital transparency and shifting social norms is creating a feedback loop that cannot be ignored. If that encourages companies to change strategy, say by cutting carbon emissions, it is good. If it puts pressure on governments to make crucial reforms, like introducing a carbon price, it is even better, particularly if companies are shamed into demanding such policy actions.
The more that voters, citizens and investors can scrutinise progress, or lack of it, the more effective the feedback loop will be. This is why ESG matters: it is fuelling an explosion in digital transparency in the corporate and non-governmental space.
So sneer about greenwashing, if you want. But we should also cheer the new data transparency, from robots or anywhere else. Then pray that this digital sunlight does not just combat corruption but forces policy change, in tandem with ESG. Heaven knows our planet needs it.
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