Environmental, Social, and Governance issues are interconnected – but are still not treated equally. That needs to change.

As 2022 comes to a close, we begin to see headlines announcing the ‘word of the year’. I must confess that ‘splooting’ is new to me – clearly, I’ve been lying face-down on the floor wrong all these years – but in the business world, I’m going to offer an early contender for corporate word of the century: ESG. This word has had a meteoric rise in recent years, and now commands global debate and trillions of investment dollars. ESG has done much good; but splitting out the nest of issues that threaten our world into three separate letters is not without its problems.

‘They’re fundamentally interdependent, the environmental, social and governance [factors],’ argued Tara Schmidt on our latest episode of Conversations on Climate. As Head of Sustainability and ESG Finance at Lloyds Bank, Tara has cause to have given this more thought that most. In her view, it’s a mistake to try and separate these issues out from one another in the belief that we can tackle them – on invest in them – independently. ‘Climate isn’t just about the environment. Climate change is also about society.’

As an example, Tara pointed out that the choices we make around decarbonisation will unavoidably have an impact on social equity. Who will bear the costs of the energy transition? Where will new green industries be sited, and what effects will that have on regional inequality? How shall we treat the phasing-out of ageing assets, when the most inefficient cars, homes, and even local economies are often those used by the poorest? Arguments that our society can’t afford to invest in clean technologies in the face of an energy supply crunch are easy enough to counter, and often made in bad faith anyway. But we must beware the costs of taking a ‘green leviathan’ approach to net-zero, without regard for the human impact along the way.

We can’t focus only on climate in isolation; and by the same token, we must recognise that all policy is ultimately environmental policy, and all business activity is ultimately environmental activity. How we design our transport networks, grow our food, build our homes, trade and educate and govern and care for each other…all these things involve relationships with the natural world, with land and energy and with transformational material processes. The first principle of ecology is interconnectedness, and ESG itself is no different.

First among equals?

Interconnectedness is easy enough to understand conceptually, but our current paradigm for operationalising ESG throws up immediate challenges – foremost of which is the problem of measurement. An entire industry has sprung up to track carbon emissions, which has (unfortunately) become the near-exclusive measure of Environmental progress. But the Social and Governance elements are much harder to quantify: the former because it is such a diffuse and diverse set of concerns; the latter because it feels more nebulous and normative by definition. Just which measure of social benefit should we prioritise – incomes, inequality, equity, opportunity, health, education, autonomy, gender, race, geography…? And what does ‘good’ governance look like anyway?

The risk here is that the environment – carbon in particular – gobbles up all the focus within ESG because it is easier to account for, and ESG ends up as a very wobbly three-legged stool. Governance in particular is treated as a poor relation. Yet even on its own terms, this bias is self-defeating. The current COP27 negotiations (ongoing as I write this) throw up a great example of how overlooking governance undermines efforts to solve climate change.

Work from Global Witness has revealed that 636 fossil fuels lobbyists were accredited for the talks, an increase of 25% over the previous year. This makes the fossil fuel lobby the single largest delegation with the exception of the UAE. In fact, these lobbyists outnumber all national delegates from the ten countries most impacted by climate change, even as activists and indigenous representatives from the global south have been shut out by high costs, visa struggles, and repressive surveillance technologies. Meanwhile, the companies who are gaining access – Chevron, Shell, BP, and the other majors – are the same ones who are agitating for more fossil fuel exploration, and who have spent over $1bn since the Paris agreement on misleading climate lobbying and branding.

This is possible because 29 governments have incorporated fossil lobbyists within their national delegations, including many African countries. Why? Because developing countries are no more immune to the influence of money in politics than anyone else. It is ironic that COP27 is hung on the fact that the governments of the Global North refuse to properly fund climate efforts in the global south; whilst oil and gas companies (also from the Global North) are happy to rush into the gap, offering billions in FDI in exchange for oil and gas concessions.

Land allocated to fossil fuel extraction in Africa is set to quadruple; 30% of it overlaps dense tropical rainforests of which 90% are in the Congo basin, one of the few remaining global reservoirs of biodiversity and home to 150 distinct ethnic groups. Yet the DRC, Republic of Congo, Rwanda, and other nations of the basin are amongst those with fossil fuel executives in their COP delegations. And it doesn’t take a great deal of time digging into the history of western oil companies’ behaviours in sub-Saharan Africato know that the risks extend far beyond any carbon count.

This is a monumental failure of governance, not least from within these fossil fuel firms themselves. And it will have real impacts, both environmentally and socially. Yes, governance may be a trickier measure, and it resists simple box-ticking compliance. But it is no less important for that.

Connecting the dots

Meaningfully connecting ESG factors is an example of higher-hanging fruit. It will be more challenging, but also more rewarding. For hints on the way forward, I turned again to my discussion with Tara.

Firstly, she is absolutely correct in highlighting the benefit of thinking more locally. Whenever power is exercised closer to home, mutually-reinforcing ESG connections become far more obvious because feedback loops are better at transmitting information.

Local people know best the impacts of economic activity on their own environment; are more sensitive to social effects, which are also more visible at smaller scales; they do not have to struggle to overcome complexity and distance when evaluating and altering decision-making.

If we can work to organise economic activity at a more appropriate scale – and regional development teams for business lending was an example Tara gave from her own work – then the elements of ESG will naturally become more integrated.

Secondly, whilst the frameworks she mentioned are important, I think we need to be careful not to become beholden to measurement as the only ground upon which to take action. Gathering data is most valuable when we have an uncertain picture of the reality around us. Today, however, we do not lack for information about the challenges we face – climate, inequality, and corruption are all exhaustively mapped. And just because some of these issues are more resistant to scientific measurement than others, that does not mean that we don’t know what to do about them.

None of the great 20th-century movements for justice – from suffrage to apartheid – waited around for us to develop more precise ways to quantify the problem. Nor did they hold up transparency and disclosure as adequate proxies for change. Instead, they were led by people who took real action when faced with the obvious.

So it should be with ESG today. We don’t need ever more decimal points before we decide to do what needs to be done, on even the hardest to measure elements. Instead, if we act with integrity to solve one kind of problem wherever we find it, we shall discover we are also working to heal the whole.