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A Conversation on the Challenges of Growing ESG Investing Worldwide

By Amy Brown
ESG Investing

Yesterday, we started a conversation with Georg Kell, considered one of the fathers of environmental, social and governance (ESG) investing. His new book, Sustainable Investing: A Path to a New Horizon, takes a close look at the historic convergence between corporate sustainability and ESG-lens investing as a force for good that, together, help drive systemic market changes.

Since his retirement from the United Nations, Kell has been advising executives from diverse industries on questions of business transformation and sustainability. And for four years, he has been chairing the Volkswagen Sustainability Council and working to lead the company out of its crisis following the "dieselgate” scandal in 2015.

TriplePundit: What are the main challenges in building a more sustainable financial system and to bring climate risk and resilience into ESG-lens investing and, really, the heart of financial decision making? You note in your book that we’re talking about a massive reallocation of capital, creating unprecedented risks and opportunities, in what you describe as a VUCA (increasingly volatile, uncertain, complex and ambiguous business context). Can you expand on that?

Georg Kell: There are short-term challenges for investors and sustainable investing at large. It's still difficult to get the right tool off the shelf at the right moment. The data world is still not up to speed. There's a lot of inconsistency and incoherence. However, at the same time, there is a lot of innovation happening and I'm quite confident that much better data analytics and capabilities are being brought to the marketplace. This will enable financial institutions to embrace this agenda much faster.

Another challenge is that there's still uncertainty about the bigger framework conditions on the regulatory side.  The new taxonomy being released in Europe, however, will be a major regulatory push for this movement, which the market is watching closely.

Another problem is: How do you change financial institutions from within when the leadership is reluctant to embrace change or give up established practices? Again, COVID-19, I am convinced, will accelerate that change at the institutional level.

I also think business education needs an overhaul. Business students today are still looking at finance as a black box isolated by and large from societal changes. There's a major transformation happening in societies where ESG issues are gaining relevance, and it affects all industry sectors. Getting a handle on that will be increasingly necessary to be successful in the field of business.

Sustainable Investing: A Path to a New Horizon, looks at the historic convergence between corporate sustainability and sustainable investing.

3p: What are the main drivers that will determine if we can rise to the challenge of sustainability?

GK: In my mind, there are three forces, and they’re universal. They play out across all countries and regions and they're irreversible, at least in the short or medium term. The first is technology. Clearly the pace of innovations has been accelerating. Technology allows transparency. It allows measurement and quantification of externalities. We couldn’t handle that just a few years ago. What's happening right now is nothing short of a revolution, especially in the world of finance where big data, self-learning and AI are now kicking in to make sense out of ESG factors and offering much deeper insights into risks and opportunities. This is helping financial analysts who may not necessarily have the knowledge about ESG issues, but want to apply some off-the-shelf tools.

Secondly, we have the concept of the nine planetary boundaries that provide a safe operating space for humanity, as developed by climate scientist Johan Rockström, a contributor to the book. The boundaries include climate change, biodiversity loss and extinction, land-system change, freshwater use, and ocean acidification, among others. Crossing these boundaries increases the risk of generating large-scale abrupt or irreversible environmental changes. We are just now realizing that the pace of disruption to the these planetary boundaries is happening much faster than even scientists have predicted, as we see with the wildfires in California now and the ones in Australia earlier this year.

The third force, and this also makes me feel positive, is young people. I have lived in the U.S. for over 30 years, and I am delighted that young people are taking to the streets around social issues. It shows they care about their future and they want to contribute to the public good. This intergenerational change is powerful.

3p: How should company leaders demonstrate to investors that they are serious about ESG in a new financial system with climate resilience at the center?

GK: Businesses have long understood that efficiency is important to reduce costs and reduce potential liabilities. But it is only recently that corporations have started to understand that their emissions and footprint are more than just the cost factor in the equation. Many of them did just enough to comply with regulation — a game of compliance optimization. That has changed radically because carbon and emissions are now seen as one of the central pillars for a future license to operate. It goes beyond a fundamental cost aspect into a strategic component. That is also because carbon pricing is bound to increase; negative carbon is bound to become the currency of the future. Corporate executives are starting to understand that regulators over time will be quite tough on these issues, and there's no escaping anymore that consumers and customers increasingly want to know their footprint.

And increasingly investors are aware of the risks of companies being too exposed on the emissions side and then all of a sudden falling into the trap of stranded assets or negative backlash. Investors want to hear from executives: What is your plan to reduce carbon and other emissions? How do you think you can achieve this? What kind of technologies were you betting on? How is your value chain organized and can you carry them with you? What are the bottlenecks? They want to have a compelling narrative. And of course, we want to know if companies can tell us their current footprint. Amazingly, many corporates still don't have a good accounting for their emissions. In today’s world of risk management, that is inexcusable.

Corporations have to move from compliance optimization to advocate a policy framework for carbon pricing. In other words, they need to see their role as no longer blocking climate action policies but actually supporting them, because if your new business model is to be successful, we need a change in policy frameworks. In the end, there’s just no way around committed leadership. Increasingly, disruptions are ahead of us. It’s becoming the new normal. You need to have clear understanding of the issues. And then you build your processes, your operations, and you retool them. And if you have the ambition, you design the leap for the future.

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Image credit: Bryan G/Unsplash


Amy Brown headshot

Based in Florida, Amy has covered sustainability for over 25 years, including for TriplePundit, Reuters Sustainable Business and Ethical Corporation Magazine. She also writes sustainability reports and thought leadership for companies. She is the ghostwriter for Sustainability Leadership: A Swedish Approach to Transforming Your Company, Industry and the World. Connect with Amy on LinkedIn and her Substack newsletter focused on gray divorce, caregiving and other cultural topics.

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