By Paul Mueller
A truly dizzying alphabet soup of organizations advocates the use of Environmental, Social, and Governance criteria — CFI, GRI, MSCI, FSB, SASB, ISS, CDP, ICMA — and the list goes on and on. Yet if we want to understand the ESG movement “ecosystem,” we have to consider major players and their roles. Doing so will help us evaluate which organizations are most influential and consider what motivations may drive their actions.
For the sake of clarity, I have categorized organizations by their function and highlighted a few organizations worth knowing in each category. Working from a high-level, broad advocacy to nitty-gritty implementation, organizations are:
1. Goal Creators
2. Standard Setters
3. Advisors
4. Consultants
5. Assessment and Bond-Rating Agencies
6. Implementers
7. Investors
8. Activists
1. Goal Creators
United Nations Global Compact
Financial Stability Board
World Economic Forum
A few global organizations set the pace and direction for the ESG movement. The goals they set become focal points for setting ESG standards, benchmarks, metrics, and rules.
No initiative is more important than the United Nations Global Compact. The UN Global Compact sets the international goals for greenhouse gas emissions, carbon reduction, and social and governance criteria. It draws on the ideas of the Intergovernmental Panel on Climate Change (IPCC) and other climate-focused organizations, but the UN Global Compact formalizes the goals. In 2015, the UN Global Compact created seventeen broad “Strategic Development Goals” to be implemented by 2030. These goals speak to climate change, water and land ecosystem preservation, gender equality, clean energy, and much more.
Another important goal-setting organization is the Financial Stability Board (FSB). The FSB is an international body, funded by the Bank of International Settlements (BIS), that recommends regulations for the financial sector. It replaced the Financial Stability Forum, formed in the 1990s to promote international financial stability in the wake of the Asian debt crises and the failure of Long-Term Capital Management.
The FSB has created a Task Force on Climate-Related Financial Disclosures, chaired by Michael Bloomberg. It argues that ESG considerations should not only be disclosed and reported in financial documents, but that these non-financial considerations should be part of investment managers’ fiduciary responsibilities — especially for pension funds. The Financial Stability Board has also been a key advocate that financial institutions (including the Federal Reserve) incorporate “climate risk” in their decision-making.
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The World Economic Forum also plays a central move in the push for greater ESG adoption. Its Davos conferences gather wealthy individuals and the leaders of large corporations, NGOs, and governments from around the world, generating significant energy for ESG advocacy.
2. Standard Setters
Ceres
International Capital Market Association (ICMA)
Climate Bonds Initiative
Global Reporting Initiative (GRI)
International Financial Reporting Standards (IFRS)
International Sustainability Standards Board (ISSB)
Sustainable Accounting Standards Board (SASB)
The Strategic Development Goals (SDGs) set by the UN Global Compact are rather broad and vague. To have any impact, they need organizations to translate the SDGs into specific standards and metrics. Hundreds of organizations are happy to do just that. Here we’ll focus on a handful.
Ceres works to create initiatives and “alliances” of investors and companies to achieve sustainability. For example, Ceres’ leaders want to decarbonize “six of the highest-emitting sectors” by 2030. They have put together a coalition to advance the rapid adoption of electric vehicles. They have also created the Net Zero Asset Managers’ Initiative — a consortium of asset managers committed to steering their investments towards promoting net-zero greenhouse gas emissions by 2050; “consistent with their fiduciary duty,” of course.
Then, the International Capital Market Association (ICMA) addresses a wide gamut of financial guidelines and activities. It provides guidance criteria for “Sustainable Finance” — what constitutes a green bond, blue bond, or a sustainable bond. The Climate Bonds Initiative also writes guidelines for “sustainable” bond issuance.
The Global Reporting Initiative (GRI) seeks to promote “a sustainable future enabled by transparency and open dialogue about impacts.” GRI plans to achieve this mission by developing extensive reporting requirements for industries ranging from mining to food production to forestry to banking to construction to pharmaceuticals. In fact, it would be difficult to find an industry for which they don’t have ESG standards! GRI explicitly seeks to advance the Strategic Development Goals of the UN Global Compact. Their website states:
GRI was founded in Boston (USA) in 1997 following on from the public outcry over the environmental damage of the Exxon Valdez oil spill, eight years previously. Our roots lie in the non-profit organizations CERES and the Tellus Institute, with involvement of the UN Environment Programme. The aim was to create the first accountability mechanism to ensure companies adhere to responsible environmental conduct principles, which was then broadened to include social, economic and governance issues.
The International Financial Reporting Standards (IFRS) Foundation maintains another set of international accounting standards through the International Sustainability Standards Board (ISSB) and the Sustainable Accounting Standards Board (SASB). While many of these accounting rules were initially created to handle intangible or underappreciated risks from environmental, social, or governance issues, the standards increasingly reflect the UN Global Compact’s Strategic Development Goals.
3. Advisors
Greenhouse Gas Protocol
Principles for Responsible Investment (PRI)
Sustainable Purchasing Leadership Council
Carbon Disclosure Project (CDP)
There is no simple or straightforward way for companies to “implement” ESG. Instead, an assortment of organizations have taken on the role of advising business leaders on how they can incorporate ESG criteria into their operations.
While any good ESG advocate, especially an NGO, would be happy to tell you what to do, some organizations are better at getting into the nitty-gritty details of implementation than others. The Greenhouse Gas Protocol, a joint project between the World Resources Institute and the World Business Council for Sustainable Development, seeks to establish “comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.”
The organization Principles for Responsible Investment (PRI) is another off-shoot of the United Nations. It explicitly encourages businesses to sign on to an ESG program of “investment analysis and decision-making,” “ownership policies and practices,” and requiring certain disclosures for “entities in which we invest.” Signatories are also exhorted to encourage other companies to become signatories themselves. PRI offers resources for integrating ESG into investment and ownership decisions, and best practices for reporting on ESG criteria.
The Sustainable Purchasing Leadership Council specializes in helping large companies and organizations advance sustainable goals in their supply chains through their procurement processes. It provides examples of how companies can avoid greenwashing. The Carbon Disclosure Project (CDP) focuses on generating data and disclosures that will lead to change. They specifically aim to halve emissions by 2030.
4. Consultants
McKinsey & Company
Deloitte
Boston Consulting Group
Bain & Company
Many of the largest and best known consulting companies have jumped on the opportunity to expand their services into the ESG space. They sell ESG compliance as being profitable and cutting-edge as well as socially responsible.
McKinsey & Company and Deloitte, for example, have incorporated ESG ideas into their strategies, products, and services. McKinsey actively promotes board diversity, advocates dramatically reducing carbon emissions, and assumes that significant value can be generated while implementing various green technologies. Deloitte sponsors ESG content at the Wall Street Journal’s “Pro Sustainable Business” website.
Boston Consulting Group will happily offer consulting services about implementing Diversity, Equity, and Inclusion (DEI) goals. So will Bain & Company. And, of course, you may have heard of people who have built their careers around DEI issues, like author Robin DiAngelo or public intellectual Ibram Kendi.
5. Assessment and Bond-Rating Agencies
Organizations that assess companies’ compliance and success in meeting various ESG goals and criteria wield tremendous influence. They determine a company’s ESG score or rating — which impacts its public reputation as well as whether it can be included in ESG-focused investment funds or be eligible to issue “sustainable” bonds.
Institutional Shareholder Services (ISS) was founded in 1985 to provide better information for shareholders, particularly around corporate governance. Today they provide data, analysis, and evaluations of industries and companies to large institutional investors. ISS goes so far as to recommend how institutional investors ought to vote the proxies on the millions, and sometimes billions, of shares that they manage. Environmental, Social, and Governance concerns play a prominent role in their recommendations and how they evaluate companies: It is “no longer optional.”
For example, they recommend that their clients vote against nominees for board if there is not a woman or a racially or ethnic minority person already on the board:
Gender Diversity: Generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the company’s board….
Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members.
The research firm S&P Global offers market analysis, benchmarking, and other recommendations to its clients. It also stamps bonds as being green or blue or sustainable. On its website, the S&P specifically mentions “Net Zero” investing and offers indexing and evaluations of companies based on how well those companies are moving towards reducing and offsetting their carbon emissions.
Another investment research and rating organization — and perhaps the most committed to advancing Environmental, Social, and Governance issues — is MSCI . Diversity, Equity, and Inclusion are a critical part of their values. They have also rated companies and industries based on how “aligned” they are with the carbon emissions reduction goal for 2030, supposedly intended keep global temperature rise under 1.5 degrees Celsius “above pre-industrial times.” MSCI has built an enormous framework, data set, and indices around the idea of sustainable investing. Looking at their dynamic scoring of companies that are aligned or “strongly misaligned” is entertaining — almost as entertaining as Exxon Mobil being kept in the S&P 500 ESG Index last year while Tesla was removed from it.
Together, these three investment research and rating firms have tremendous influence over how trillions of dollars of capital are allocated. They are also the gatekeepers, so to speak, of what counts as an ESG or climate priority and what doesn’t. At the end of the day, however, significant amounts of their modeling and recommendations are based on projections (of ecology, temperature, weather patterns, trends in public policy, etc.), rather than reality.
6. Implementers
A veritable cottage industry has grown up around the ESG movement. Entrepreneurs recognize that money, potentially a great deal of money, can be made by providing ESG-related services from assessment and reporting to carbon sequestration.
For example, new software firms offer companies ways to track, evaluate, and report their emissions. Persefoni markets itself as a “carbon accounting firm” while Position Green offers emissions tracking software. Sylvera specializes in generating and analyzing carbon data — offering its own ratings and evaluations of specific carbon reduction or offset projects.
The Wall Street Journal recently highlighted the company Graphyte as an up and coming carbon sequestration firm. They sell “removal” of carbon from the atmosphere at a small fraction of the cost of other carbon sequestration firms. Their business model involves collecting biodegradable materials that would emit carbon, such as “sawdust or tree bark,” making them into bricks, and burying the bricks. Oh, and the money comes from firms like American Airlines that sell goods and services that consumers actually want.
7. Investors
Money is the oxygen of the ESG ecosystem. Firms that direct investment funds towards ESG projects keep the movement alive.
A variety of firms have emerged to fund carbon offset companies and carbon credit markets. They participate in a kind of venture capital market for new companies whose focus on carbon sequestration or offsets. Base Carbon is an example of a private equity firm in this space. Carbon Streaming is a similar kind of company, which helps fund preservation projects around the world through the generation and sale of carbon credits.
Devv Stream, for example, acts as an intermediary between companies that want to generate carbon credits and companies who want to buy those credits. It works with a range of companies in the carbon credit space, from renewable energy producers to carbon capture technologies to managers of chemical and other waste.
Similarly, the massive investment group, Brookfield, has committed to funding low-carbon projects. While this investment firm has oriented all its investments around net-zero goals and reductions in carbon emissions, most major banks (Goldman Sachs, JP Morgan, etc.) and large institutional investors (Blackrock, State Street, Vanguard, etc.) allocate at least some of their assets in a similar way.
8. Activists
Climate Action 100
We Mean Business Coalition
Climate Group RE 100
While all the organizations listed so far want ESG to become more widely adopted, several organizations exist solely to lobby for broader ESG adoption in law and regulation. They also drive public pressure on companies to increase their commitments and ESG goals.
Climate Action 100 sets benchmarks for whether companies are moving towards net zero quickly enough. It represents a coalition of investors and large corporations who have all agreed to work towards reducing their carbon emissions. This broad coalition claims its members represent over $68 trillion in assets, and has an explicit “Engagement Process” for getting more companies to commit to net-zero goals.
The We Mean Business Coalition has even more aggressive climate goals — seeking to persuade legislators to phase out fossil fuels altogether, and as soon as possible. Across seven different industries, the coalition has written dozens of recommendations for government actions, from more stringent emissions standards to increased reporting requirements to mandated reduction of fossil fuel use.
Climate Group RE 100 is a narrowly tailored coalition of corporations committed to moving to 100 percent renewable energy use in their operations by 2050. It seeks to get large corporations to sign on to its commitment, noting that its current 400+ signatories currently use more energy than France does.
Of course, hundreds of political activist organizations and politicians also happily fold ESG criteria into their portfolio of issues.
Untangling the Web: It Begins with the UN
Stepping back, we can reflect on the broad “ecosystem” of ESG advocacy. Different organizations play different roles (sometimes complementary, sometimes competitive) with other members of the ecosystem. We can make some preliminary judgments about the most important elements of the ecosystem — the elements that sustain it.
The UN Global Compact plays an essential role. Were it to change its Strategic Development Goals, every other organization would adapt. This is not the case when a software company like Persefoni decides to track or evaluate this or that indirect greenhouse gas emission. Furthermore, while we should be careful not to divide these motives too starkly, it seems clear that a substantial part of this ecosystem is chasing the billions of dollars at play, while other parts of the ecosystem are driven by deep ideological commitments and the more intangible benefits of status and influence.
Source: AIER
Paul Mueller is a Senior Research Fellow at the American Institute for Economic Research. He received his PhD in economics from George Mason University. Previously, Dr. Mueller taught at The King’s College in New York City.
His academic work has appeared in many journals including The Adam Smith Review, The Review of Austrian Economics, and The Journal of Economic Behavior and Organization, The Journal of Private Enterprise, and The Quarterly Journal of Austrian Economics. He is also the author of Ten Years Later: Why the Conventional Wisdom about the 2008 Financial Crisis is Still Wrong with Cambridge Scholars Publishing.
Dr. Mueller’s popular writing has appeared in USA Today and Fox News, as well as the Intercollegiate Review, Christian History, Adam Smith Works, and Religion and Liberty, among others.
Dr. Mueller has given talks and led colloquia for a variety of organizations including Liberty Fund, the Institute for Humane Studies, the Intercollegiate Studies Institute, and the Russell Kirk Center for Cultural Renewal.
Dr. Mueller is also a Research Fellow and Associate Director of the Religious Liberty in the States project at the Center for Culture, Religion, and Democracy. He owns and operates a bed and breakfast (The Abbey) in Leadville, Colorado where he lives with his wife and five children.
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