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November 14, 2023updated 21 Nov 2023 4:14pm

An Orwellian moment for sustainable investment

Mark Tulay, chief executive and founder of SPARC, explains that as the GOP-led "War on Woke" seeks to dismantle ESG investing, there needs to be a reinvention of investment norms.

By Mark Tulay

Mark Tulay, chief executive and founder of SPARC, explains that as the GOP-led "War on Woke" seeks to dismantle ESG investing, there needs to be a reinvention of investment norms.
Right-think for sustainability (Photo by ColinCramm via Shutterstock)
  • There has been a surge in anti-ESG legislation across 37 states in the US.
  • Four transformational shifts are needed: to reimagine investing as a force for good; redefine the rules of the road for sustainable investing; reinvent the new normal for investing; and redeploy resources to scale adoption.
  • Sustainable investing will achieve more equitable outcomes for people and the planet.

The US author Isaac Asimov noted that humanity is cutting down its forests, apparently oblivious to the fact that we may not live without them. He was citing the neo-conservative Wise Use movement as a catalyst for accelerating deforestation in the United States.

The Wise Use group’s founder, Ron Arnold, deployed duplicitous tactics 30 years ago to mobilise anti-environmental public sentiment in the US. “Facts don’t matter; in politics, perception is reality,” he said. The group sought to obfuscate complex environmental and economic issues into deceptively polarising terms crafted to benefit the financial interests of its corporate backers. The group’s sole purpose was to eviscerate the environmental movement. “We’re mad as hell. We’re dead serious. We’re going to destroy them [environmentalists],” he told the Portland Oregonian in 1993.

Today, 25 years after the demise of the Wise Use movement, its latest incarnation emerged as the dystopian, GOP-led War on Woke, with its main goal aimed at seemingly dismantling and prohibiting any investment strategy incorporating environmental, social, and corporate governance (ESG) factors.

The current circumstances make for an unprecedented test of capitalism and capital markets, creating a critical need for sustainable investors to gain a deeper and more highly contextualised understanding of the emerging issues and indicators that are both financially material and stakeholder salient. Astute investors need a new playbook to cut through the fiction and friction spurred by the anti-ESG campaign and to assess whether their portfolio companies are future-proofed.

ESG friction and fiction

In February, House Republicans introduced a working group aimed at dismantling the trillions in investor assets under management incorporating a company’s ESG performance, seeking to build on the spurious narrative promulgated by the “war on woke” campaign that has resulted in 167 pieces of anti-ESG legislation introduced in 37 states this year. Their work intensified in what the GOP dubbed “ESG Month”, a campaign targeting investment managers for considering the financial repercussions of seemingly everything ESG, from extreme weather events to severe water scarcity and human rights violations.

Last week, the anti-ESG rhetoric reached a crescendo when Jim Jordan (R-Ohio), the head of the GOP-controlled House Judiciary Committee, issued a subpoena accusing the shareholder mobilising non-governmental organisation, As You Sow, of allegedly illegal activity to advance a left-wing political agenda. “Corporations are collectively adopting and imposing left-wing environmental, social, and governance (ESG)-related goals and the Committee is concerned that As You Sow appears to facilitate collusion that may violate US antitrust law.”

The letter also accused As You Sow – whose stated purpose is to advocate for a safe and sustainable world in which protecting the environment and human rights are central to corporate decision-making – of entering into “collusive agreements with Climate Action 100+ and other ESG cartels”.

The subpoena follows a letter the Committee sent in August to As You Sow, Engine No. 1, Institutional Shareholder Services (ISS), Glass Lewis, Arjuna Capital, Trillium Asset Management, Aviva Investors Americas, along with earlier requests sent to Ceres and CalPERS, the largest public pension fund in the US with assets under management eclipsing $450bn.

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This political theatre has curbed the number and type of ESG shareholder proposals permitted by the SEC to go to a board vote. More significant is how these efforts will likely soften the SEC’s long-delayed climate change reporting rule calling for companies to report on their direct and indirect (Scope 3) carbon emissions. The threat of subpoenas is chilling, suppressing innovation, and ushering in a new period of ESG hushing [see chart].

The new sustainability maths

But in a split-screen moment, sustainable investors celebrated a breakthrough 25 years in the making when the alphabet soup of ESG reporting standards coalesced around its newly anointed kingmaker, the International Sustainability Standards Board (ISSB), housed under the auspices of the International Financial Reporting Standards (IFRS). As a result, the ISSB now has the final say in how thousands of companies report on hundreds of industry-specific metrics that investors will rely on to assess how a company’s environmental and social performance impacts its financial bottom line.

And on 31 July, in a concerted effort to harmonise, standardise, and legitimise the accounting rules for corporate ESG disclosures, the European Commission adopted the European Sustainability Reporting Standards (ESRS) Act, adding its imprimatur to bolster the ISSB’s twin cousin, the Corporate Sustainability Reporting Directive (CSRD).

These achievements point to the emergence of a new type of investment-grade data, equipping investors with the data needed to distinguish future-fit companies committed to ramping up resources for sustainability programs from those failing to invest adequately in the inevitable transition to a low-carbon economy. Capitalising on these opportunities requires decisive actions from investment managers and advisors. Achieving this desired positive impact at the needed scale and velocity requires four transformational shifts.

Investing as a force for good

Investors are increasingly troubled by the confusion, controversy and credibility of ESG investing. Steering the conversation from ESG to high-impact sustainable investing promises to raise investor sites and enthusiasm because sustainable development is a fundamental break that will reshuffle the entire deck.

By widening the aperture of issues and indicators used in investment decision-making, impact investing promises to mobilise capital at the scale needed to tackle today’s wickedly complex social and environmental challenges.

It's critical to hone in on the root cause of sustainability challenges to ensure investors aim at the right target. For example, climate change is a symptom of a more systemic issue that rarely makes the headlines: unsustainable extraction and consumption of natural resources. A recent study by global pressure group the Natural Capitals Coalition finds that the world's biggest industries “burn through” $7.3trn worth of free natural capital a year.

As environmental crusader Paul Hawken puts it: “We are stealing the future, selling it in the present, and calling it GDP”.

The rules of the road

A prerequisite for mainstreaming high-impact, sustainable investing is achieving clarity of purpose on its end goals. It is critical to know if the investment objective is to assess how ESG factors impact a company's financial performance, financial materiality, or whether the intention is to measure the impact of a company's effects on people and the planet – stakeholder/double materiality. If maximising shareholder value over the long term is the end goal, then the ISSB standards are the best fit. If the end goal is focused on measuring a company's impact on its key stakeholders, then the United Nations’ Sustainability Development Goals (SDGs) provide the North Star.

Astute investors need a new playbook to determine whether the companies they own are future-fit. The playbook should include new impact metrics and ratios for assessing a company's impacts on people and the planet over the long term, using the financial materiality threshold set by the ISSB standards as the starting line and the aspirations of the SDGs as the aspirational finish line.

The new normal for investing

"In God we trust; all others must bring data," said US economist Edwards Deming. But in today's 'be careful what you wish for' moment, investors are awash in a tsunami of environmental, climate change, and social issues, indicators, and data. Important questions need answers before investors can optimise their use of this treasure trove of new information, such as: What is the strategic fit of stakeholder-derived sentiment data in measuring a company’s impacts on people and the planet; how can savvy investors discern salient stakeholder-generated signals from the noise that can obfuscate early warning signals; and how can Generative AI, machine learning, and natural language processing deliver on their promise and potential to assimilate unstructured data to fill today’s impact investing data gaps?

Answering these questions requires standardised impact investing ratios to complement ratios used in financial analysis, such as earnings per share (EPS), price-earning (PE), and return on equity (ROE). To this end, SPARC is piloting the suitability of new impact investing ratios that include return on impact investment (ROII), net positive impact value (NPIV), and internal rate of impact return (IRIR).

Resources to scale adoption

The father of advertising David Ogilvy pointed out that business is “infested with idiots” who try to impress by using pretentious jargon. The same can be said about ESG jargon today. It thwarts mainstream investor adoption and should be irradicated.

Impact investors should build a bigger tent for investors by adopting a welcoming, non-confrontational narrative that protects against the narcissism of small differences.

US President John Adams vehemently defended eight British soldiers accused of murder during the Boston Massacre of 1770. “Facts are stubborn things, and whatever may be our wishes, our inclinations, or the dictates of our passions, they cannot alter the state of facts and evidence,” he said. It is a poignant reminder of the courage and conviction needed to repudiate alternative facts championed by far-right extremists and lean into today’s critical debate on the role and purpose of corporations in society.

Sustainable investing luminaries are under siege from the GOP’s malicious War on Woke and need your help and support. Let’s work together to deliver on sustainable investing’s full potential as an unstoppable force for good because achieving more sustainable and equitable outcomes for people and the planet is a cause too big to fail.

[Read more: Shareholder resolutions and the Big Three]

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