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A Look at the ESG Investment Landscape

Kris Dubey

ESG (environmental, social and governance) can’t be ignored. As a concept that brings focus to a more comprehensive set of business performance metrics, ESG simply provides better information to individuals and organizations that have a stake in how a business operates and performs.  

It’s hard to argue against better information: This position was widely held by the financial industry leaders who spoke at the recent Reuters-hosted ESG Investment North America event. Of course, they’re right. Better information drives better decision making.   

Why Is ESG Important?

At the event, keynote speaker Elizabeth Lewis, a managing director and deputy head of ESG at Blackstone, provided the answer: “ESG is important for reducing risks.” It goes without saying that investors are concerned with reducing risk. So are business leaders who need investments to build and grow their companies, as well as those who just want to stay in business.     

ESG covers environmental, social and governance matters, so the range of metrics that can potentially be reported is vast. This is where materiality comes in, as it aids businesses in identifying and reporting the metrics that are most relevant or significant to them. Lewis noted that Blackstone supports companies in determining which metrics are material to help them reduce risk and drive value.  

Lewis also highlighted the role of ESG in identifying opportunity. While ESG began with risk mitigation, it also helps companies find opportunities for value creation, and according to Lewis, these opportunities are now plentiful. She added that companies are actively looking to build ESG capabilities, with more businesses now requesting Blackstone’s help in developing them.  

Understanding the Role of the Private and Public Sectors

The conversation around risk is often associated with the impact of climate change on business operations, performance and outlook. It also looks at the impact of business operations on climate change and the environment. While it’s agreed that the private sector must understand and take action to reduce their environmental impact, the public sector must also engage in the effort. “There’s no sector that isn’t touched by climate risk,” according to Mindy Lubber, CEO of sustainability non-profit organization Ceres.  

Blackstone’s Lewis also touched on this, noting that there’s much the private sector can do to solve climate change, but it can’t do everything. As an example, Lewis pointed to the need for governments to help drive the commercialization of technologies that will help in the transition to a greener economy.     

Later in the event, Paul Bodnar, global head of sustainable investing at BlackRock, also commented on the role of the public sector. He noted that while decarbonization is a public policy problem, it can’t be left to governments to solve it. Similarly, the financial sector shouldn’t be thought of as a substitute for good public policy. He echoed the point made by Lubber, who said that the transition to net zero must involve all, including consumers, companies, investors and policy makers.  

Where Is Decarbonization Going? Look Ahead and Act Quickly

For investors, the dynamic nature of climate-related risk complicates the risk management challenge. The pace of change isn’t clear, according to Bodnar, but to stay ahead, investors need to understand how quickly things are going to move. They can’t invest in the economy as it is now; they must think ahead. This means trying to predict how decarbonization will unfold.  

Lewis emphasized the need for specialized talent. Companies must have specific, sophisticated skills to be able to measure their carbon footprint. And businesses that want to reduce waste need the right expertise. To accurately measure, monitor and address ESG metrics, companies need the right skill sets, and for many companies, the acquisition of those skills must take diversity, equity and inclusion (DEI) goals into consideration. While the DEI factor adds an extra degree of complexity, businesses must move quickly to put the right capabilities in place, so they can manage ESG reporting requirements and capitalize on the opportunities that are emerging.  

Why Decarbonize?

The need for decarbonization is certainly evident in the severe weather events of the past several months. The World Weather Attribution Initiative says the intensity of devasting monsoon rains that led to severe loss of life and property in Pakistan this year was likely caused by climate change. And according to CBS News, climate change is responsible for the tropical storm phenomenon of rapid intensification, which was witnessed at least twice as Hurricane Ian approached the U.S. coast this fall. The phenomenon causes tropical storms to gain strength very quickly.        

So, increasing evidence of climate change is driving decarbonization. But decarbonization is also a solid value-driver for businesses, as Lewis explained. Companies that have a lower carbon footprint will be valued more highly in any jurisdiction. So—whether prompted by compliance obligations or not—it’s time for companies to measure and report their carbon footprint and then take transparent, concrete steps to reduce it. It’s just good business.    

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