Two decades of ESG

ESG or environmental, social and governance is a term coined 20 years ago by Kofi Annan, former secretary general of the United Nations. But it only gained traction about a decade ago, largely spearheaded by developed countries in the West.

In Southeast Asia, adoption of ESG has remained relatively low, though the last couple of years has seen stronger appetite among pension funds and sovereign wealth funds. The question is whether this is enough to hit critical mass.

The most common reasons hindering ESG adoption is often lack of investor awareness and education. That’s even before taking into account pushback and intense political lobbying by companies in the oil and gas sector and their ilk.

More importantly perhaps, there seems to be little interest to learn. Pension funds can publish a million reports on why they want to integrate ESG, or why they use certain asset valuation methodologies, or why they adopt a specific framework. But if these painstakingly compiled reports are read by only a handful of people, it defeats the purpose. And the asset owners too have to bear in mind that overly technical reports may turn off investors.

To be sure, ESG is not an easy subject to get a handle on. It may be an acronym with only three letters, but each one makes for a deep subject.

Let’s take the “E”. It requires understanding an asset’s environmental impact, such as carbon emissions, waste management, deforestation practices, biodiversity, climate change mitigation and adaptation strategy, product sustainability and sustainable sourcing of raw materials, to name a few.

The “S” and “G” are just as weighty, covering areas like employee diversity, human rights policies, labour standards, shareholder rights and engagement, management transparency and data privacy.

Complexity isn’t necessarily a bad thing. In fact, oversimplifying ESG may lead to stakeholders not having a true understanding of the subject. It is also a disservice to the many companies, investors and stakeholders who have been doing the hard work of implementing strategies that conform to the requirements.

It’s good to have all that information on ESG. The onus is not just on companies to ensure that the information is presented in a readable manner, but also on investors who do actually need to read that information and understand the subject so that they can make proper investment decisions.