Is it possible to have a bank charge extortionate interest and hidden fees but have wonderful social responsibility programmes?
Is it also possible to have a company deliver great financial performance but have poor gender diversity?
Is it feasible to have a company with monopolistic tendencies but with great governance?
Should good corporate citizenry entail adoption of environmental, social and governance (ESG) values?
My short answer is yes.
So, let’s call this phenomenon the “dance of the two-faced angels,” the paradox of duality and the reason why many are questioning the practicability of the ESG movement.
How will highly subjective ESG methodologies deal with such a contradiction? How will investors deal with a rating that’s overcompensating on a single ESG factor? And how can rating agencies push corporates to desire to do better on the whole?
No doubt, ESG has a natural home in the listed markets, which already have on-going disclosure requirements.
According to the sustainable stock exchanges initiative (SSE) 2018 report, 58 stock exchanges, representing over 70 percent of global listed equity markets with over 30,000 companies and representing a market capitalisation of over $55 trillion, have adopted the mission.
Although implementation still remains low and uneven, the commitment from a number of leading stock exchanges is reassuring.
Presently, 12 exchanges incorporate reporting on ESG information into their listing rules, 38 have ESG indices, 18 provide ESG training, 15 provide formal guidance to issuers and 11 have listed green bonds.
But there are problems.
To begin with, though an SSE signatory, the Nairobi Securities Exchange (NSE) does not require ESG reporting as part of its listing rules, offers no ESG training and has no written guidance on ESG reporting— only Johannesburg Stock Exchange (JSE) does that in the continent.
This makes it hard to evaluate our local listed entities through the ESG lens presently. Be that as it may, looking at current NSE listed entities, it’s hard not to see why we are likely to face the same contradiction when we finally implement ESG.
In that case, we’ll need to begin untangling the complexity way beforehand if our market is to go the ESG way.
There is a solution, though an imperfect one.
The ESG goodwill faces a myriad of intertwined issues – different value systems, biased interpretations, costly and lengthy disclosures, shrinking public markets, standardisation challenges, --that may not go away easily.
If the status quo remains, it’ll be hard to differentiate between the true sustainability leaders from laggards.
In that case, investors need to understand that ESG Scores will not be the be-all and end-all.
Although they know what is being measured, in what way and for what objective, for good judgement, they’ll still need to rely on another metrics.
Otherwise, they run the risk of comparing “cows” with “goats.”
Blindly accepting ESG approved products would be the highest form of imprudence. For companies, there’s need for continued education on the important role they can play in advancing ESG core values. Their involvement is crucial in achieving the noble goals of the ESG movement.