Climate change is a growing topic on Capitol Hill, and it’s taken hold on Wall Street as well.
Though smart investors have always been discerning with their money, an expanding number are making their financial decisions based not only on profitability but also on how their investments create a positive impact, whether through reducing carbon emissions, promoting diversity or providing some other social good.
These “impact investors” evaluate potential investments against standards such as environmental, social and corporate governance (ESG) criteria, and more people are following their example as issues like climate change become household topics.
“There is really no historical precedent for the magnitude of the shift in investor focus that we’ve witnessed over the last decade toward the analysis and use of climate and other ESG risks and impacts in investment decision-making,” said Allison Herren Lee, acting chair of the Securities Exchange Commission.
ESG criteria and other standards like them are not only driving investment but also other major decisions across an entire business. The Say on Climate campaign is one of a growing number of initiatives that encourage companies to adopt sustainable practices, disclose and manage emissions, and even tie executives’ performance and compensation to these plans.
Meeting ESG criteria is quickly becoming shorthand for whether a company’s business decisions are having a positive impact. But these criteria are not neatly defined and companies could be missing worthwhile investments because of it.
According to Esther Whieldon—senior writer at S&P Global and co-host of the "ESG Insider" podcast—what constitutes ESG will continue to evolve and that’s a very good thing.
“Companies are always going to have blind spots to some extent when they're dealing with ESG issues because it's really all about adapting to changing social norms and expectations, and the regulations as they evolve around those expectations,” said Whieldon on an episode of “Off the Menu with Monica Trauzzi.”
“Unless you're really doing a true search of what you're planning as a company and how you handle things, then you're going to have more blind spots and that's really kind of what ESG is all about.”
One notable blind spot in current definitions of ESG involves nuclear energy.
There’s a growing chorus of climate advocates and policymakers—including the Biden administration—who see the value of nuclear energy and the key role that advanced nuclear technology could play in achieving a carbon-free economy.
However, in some ratings, nuclear energy is designated in the same category as tobacco and pornography as a socially irresponsible investment, even though it is the largest source of carbon-free electricity in the U.S. This inaccurate classification discourages investment that could turn innovations like small modular reactors into reality. These ratings are in dire need of updating.
“The metrics themselves, and how you define ESG, is really going to evolve over time,” Whieldon said. “It's going to evolve on society, how society views things.”
ESG criteria and increased climate-consciousness are an important development in the financial world that intends to help us transition to a more equitable and cleaner world. But with major decisions and investments hinging on these criteria, we need to make sure that they truly measure impact correctly. And if they leave out important investment opportunities—like nuclear energy, which will be key to any climate solution—then we need to reconsider them if we truly care about reducing carbon emissions.
View the full episode with Whieldon—the third in a series on financial investment in carbon-free energy—and check out other episodes of “Off the Menu with Monica Trauzzi.”
Transcript
Monica Trauzzi
The business community is buzzing about ESG, whether it's to improve diversity or take on a more sustainably focused strategy. But do these screens go far enough in actually driving an impact? In part three of my three-part series on investments and ESG, I talked to Esther Whieldon of S&P Global and the ESG Insider Podcast. We're at Unconventional Diner today. I'm Monica Trauzzi. This is Off the Menu.
Hi Esther. Nice to see you. Thanks for joining me.
Esther Whieldon
Hi, thanks for having me.
Monica Trauzzi
Esther, ESG has really gained all of this new momentum as we're seeing companies and industries really focusing more on being diverse, being inclusive, and also having more of a sustainability mindset. Where do you think some of the blind spots are though in these screens?
Esther Whieldon
Companies are always going to have blind spots to some extent when they're dealing with the ESG issues because it's really all about adapting to changing social norms and expectations, and the regulations as they evolve around those expectations. Part of what ESG is about is also doing an internal look at your policies, your practices. Unless you're really doing a true search of what you're planning as a company and how you handle things, then you're going to have more blind spots and that's really kind of what ESG is all about.
Monica Trauzzi
One of the things that really stands out to me is that there are some things that are included and also aren't included that you think maybe would need to be particularly on the E side. So for example, nuclear energy is the largest source of carbon-free electricity in the country, but it is rated alongside in some of the screens, tobacco, and pornography, coal. I see that as something that maybe can be looked at and modified. When you look at ESG overall, do you think that there's an appetite to reconsider this, what some think, is the floor of what we should be doing on climate change?
Esther Whieldon
Utilities, especially the ones that have set net zero emissions by 2050 targets have really said that they know how to get to 80% of that. They can use renewables. They can potentially use existing battery technology and things like that, and getting rid of coal plants to get to 80% of their target. But they need technologies, big investments in R&D, and in showing things can be scalable, and aren't risky, proven technologies. They need things like potentially they have on the table, like nuclear, carbon capture and sequestration, hydrogen. So I really think there's a difference between like maybe screens that are in funds that are kind of determined by those funds or determined by the investors. There's also screens through the renewable portfolio standard, the regulator set as what counts that's not an ESG screen, but it blocks out nuclear a lot of times.
Monica Trauzzi
Are there companies that you look at and you think, wow, that's bold, they're doing some really big, cool stuff, I want to track them? Who stands out to you?
Esther Whieldon
I was quite surprised when Southern and Duke both set net zero targets because they're two of the biggest handful of utilities. They both had quite a bit of high emissions portfolio. We know that both of them are being pretty aggressive. They have net zero targets. They're looking to develop renewables, and so they definitely are moving. Duke has even started taking on the environmental justice question. I saw that as a mark of, what's the right term, the tipping point, when you start seeing the big, big ones making those kind of commitments, that that, I think, is a big signal.
Monica Trauzzi
When we've spoken before, one thing that's come up in our conversation is that ESG isn't neatly defined. It doesn't have a standard definition that you can look up and fully understand what it means or what qualifies. Is that a problem?
Esther Whieldon
Corporations might think so because they would like to be able to have one set answer to ... They have two dozen, a dozen to two dozen places that are asking them for different things and fill out for different forms. There's been a lot of pressure for some standardization, and even the securities and exchange commissions now said, they're going to update their 2010 guidance on climate disclosures in financial reports. The metrics themselves, and how you define ESG, is really going to evolve over time. It's going to evolve on society, how society views things.
Imagine even five years ago, a company talking about racial diversity. That topic was verboten. That was just a dangerous direction to go as a company, but now all of them, even in all the conferences I attend, they're talking about how they're trying to help their employees feel more comfortable. They're investing in their communities. So there's a lot of things that change over time on how ESG is thought about and addressed. I think if you define everything about it, you're going to miss something that's important, and also technologies and other things evolve.
Monica Trauzzi
Then I think there are also signals that we see. BlackRock comes to mind when you have a very large well-known company making a statement of significance that's defining a new trend. How do you look at those moments in the news cycle, and where do you plot them on your graph?
Esther Whieldon
I think Fink's letters in general over the last two years, two to three years have been hugely instrumental in making people think about ESG and the term that's being used right now about stakeholder capitalism, the responsibility of companies, not just to their investors, but to society, to the people that use the products, to the places they operate in. By being responsible to those areas, you help the economy and it comes back to help you.
Monica Trauzzi
Thank you. That was wonderful. Thank you for your time.
Esther Whieldon
Great. Thank you for having me.
