There is general consensus that Environmental, Social and Governance principles are necessary if we want to address our generation’s urgent environmental and social challenges. But how realistic is it to expect businesses to put public interests ahead of company profitability?

ESG ratings evaluate a company’s sustainability and responsibility by analysing its ESG practices. These ratings help investors gauge a company’s management of ESG-related risks and opportunities. Investors concerned about ESG factors may invest in companies with higher ratings, believing these can deliver more long-term success and positive societal impact.

While it is true that ESG ratings also consider the potential impact of the world on companies (such as regulatory changes, climate-related risks, or shifting consumer preferences), this does not mean the ratings are solely based on those factors.

Companies use ESG to enhance their image and reputation, asserting it attracts investment, reduces capital costs, boosts margins, and fosters employee loyalty. But no empirical study has ever proven that ESG delivers higher returns.

Most people assume that ESG investing rewards companies that are helping the planet by improving their ratings. The irony is that these ratings are based on the impact that the changing world is going to have on companies, not the reverse.

When it comes to climate change, estimates show that, “Humanity will need to invest an average of $3.5 trillion annually over the next 30 years” according to an article published recently in the Harvard Business Review. Unfortunately, these trillions are being invested in assets that are only there to assure returns for shareholders, and certainly not solely to deliver positive global impact.

Unfortunately, companies often use lofty statements about social or environmental aspirations only to disguise their ultimate goal of shareholder profits. ‘Sustainable operations’ therefore translate into ‘operations made more sustainable in order to ensure higher profits.’ ESG values are not the destination but a means to an end: more profitability. According to Bloomberg, “ESG ratings don’t measure a company’s impact on the Earth and society but the opposite: the potential impact of the world on the company and its shareholders.”

ESG-related investment wrongly places the burden of transforming the economy solely on the private sector, suggesting it alone is responsible for solving societal challenges like climate change. This approach seemingly relieves policy makers and regulators from their duty to enact necessary reforms. While the private sector can surely contribute, governments too have a crucial role in driving change and bear responsibility for preventing a climate catastrophe.

Fighting climate change is entirely different than measuring and assessing the climate risk to a firm’s profits. Even critical supporters of ESG seem to be rethinking its value. According to ESG expert Robert Eccles, “We would be better off if ESG investing would just go poof, and non-financial considerations were integrated into the traditional investment research process.”

Social investing pioneer Steve Lydenberg stated that, “It is important to recognize that integration of ESG data into stock valuation models and portfolio risk management is not enough to drive systemic change when the greatest risks of the day, such as climate change, are at stake.”

Merely reporting ESG initiatives in financials won’t ensure the planet’s sustainability. It is important to emphasize market incentives, outcome regulations, increased private investment, and a global movement involving all community elements. To effectively address environmental challenges, incentives must be realigned to balance private profit and social welfare, fostering a shift towards sustainability.

There is an urgency to achieve substantial carbon emissions of seven per cent a year for the foreseeable future, necessitating regulatory action that must shift from input-based disclosures to outcome-based impacts; these are more effective on a longer term.

Thirdly, and perhaps the hardest, would be a definitive ban on fossil fuels in those sectors that pollute the most.

We are at less than one quarter of the rate of global investment required to make the transition to a low carbon future. The urgency is very real, and this will require creative public private partnerships to incentivize more investment and discovery.

Finally, ESG values must trigger a true movement because equal efforts by all companies to decarbonize will not lead to equal results. It should start from a common change in mindset that we are only temporary residents on this planet, and we owe a better environment to our future generations.

None of these recommendations are straightforward. They call for unwavering civic engagement, a unified effort and a profound restructuring of power dynamics. ESG cannot become a buzzword used to appease our guilt or alleviate our helplessness. We must embrace its immense potential as a catalyst for genuine transformation.

Shirley Zammit is Manager Communications and Brand Strategy at Corporate Identities and is currently reading for a Masters in Education for Sustainable Development at the University of Malta.

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