The world urgently requires updated standards for ESG (environmental, social, and governance), sustainability, and impact that address the lacunae of the initial wave of ESG ratings. These new standards must propel us towards a future free from global warming, poverty, and inequalities. They are essential for fostering enduring markets that align with the principles of Capitalism 2.0 or Impact Capitalism.
In May 1792, a group of twenty-four stockbrokers signed The Buttonwood Agreement, marking the beginning of the New York Stock Exchange. The agreement was made under a Buttonwood tree, located outside 68 Wall Street, where their earliest transactions took place. They committed to trading exclusively with each other, setting a predetermined commission rate, in order to foster trust and facilitate trade.
One hundred and fifty years later, in July 1944, following World War II, a gathering of 730 delegates from 44 allied nations convened at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States. They ratified a new system for international financial settlements that established a fixed currency exchange rate based on gold as the universal standard. This historic event also led to the establishment of the International Bank for Reconstruction and Development (now known as the World Bank) and the International Monetary Fund. The lengthy process of 150 years served to establish both global and local standards, promoting trust in the financial markets.
Seventy-nine years later, the world needs a new pledge to set standards for ESG (Environmental, Social, and Governance), sustainability, and impact. This needs to foster transparency and disclosures, building trust in terms of ESG, responsible business and investing, as well as sustainable and impact-oriented enterprises. These three areas lie in the realm of continuum of impact.
Despite the spectacular growth of ESG, sustainable and impact investments to US $59 trillion in 2020, up from US $23 trillion in 2016, the criticism of “green-washing”, “blue-washing” or “impact-washing” is growing, with regulators and analysts doubting claims from asset managers.
German investor DWS research found key funds (e.g., Zero Carb Tech Fund, Climate Action 100+Fund, and The Greenfurbish Fund) branded as sustainability or impact funds in Europe were ineligible to receive EU Ecolabels.
According to research by German investor DWS, key funds — Zero Carb Tech Fund, Climate Action 100+Fund, and The Greenfurbish Fund — branded as sustainability or impact funds in Europe were ineligible to receive EU Ecolabels.
Several sectors and companies have faced criticism for making unsubstantiated claims. Examples include food and beverage giants like Coca-Cola and Pepsi, the natural gas industry involved in fracking, plastic packaging manufacturers such as Poland Spring's Ecoshape bottle or Starbucks' straw-less lid, paper product companies like Kimberly Clark's Pampers, energy claims such as Walmart's Go Green campaign, and even awards like the Environmental Award given to Saudi Aramco by The Green Organization. Recently, in India, the Adani Group experienced a significant decline of 55% in its market capitalisation due to allegations of stock manipulation, despite the group's claim of attaining top-notch ESG ratings.
In a recent critique, the US Securities and Exchange Commission (SEC) announced new imminent guidelines for ESG investing, climate change risk disclosure requirements, and standardised terminology. Analysts believe that if unaddressed, green-washing and impact-washing will get a free ride, inflate fees, artificially drive-up prices of underlying assets, have negligible or no impact and mislead or defraud investors, especially retail investors.
Creating Effective Standards
We must eliminate non-standard-based ratings and assessments to bring about change. We must mandate a framework consisting of both regulatory and independent standards for ESG, sustainability, and impact. Corporations should be able to get themselves assessed, assured, and ratified based on the minimum regulatory standards or even higher independent standards. By incorporating independent standards, we can foster innovation and encourage global investors and businesses to adopt decision-oriented assessments, moving away from mere compliance.
Who should write the standards? For example, in Europe, the European Union has already notified non-financial disclosures, while the US has the Sustainability Accounting Standards Board. India has their own Business Responsibility and Sustainability Reporting guidelines. None of these systems have the same or similar key performance indicators. Standards must lend themselves to comparisons.
A three-pronged strategy could be the solution:
— Each nation must have its own sovereign right to inform minimum standards that independent or proprietary standards must meet and/or exceed
— The world must agree on controversial issues, ideally under the aegis of G20 (for example, France wishes nuclear energy be called ‘clean’; most of Europe disagrees)
— Private sector auditing, rating and consulting actors, which meet or exceed the minimum, must be encouraged to drive innovation, excellence and adoption
Today, confusion abounds. In a global market mapping exercise, I counted over 300 actors offering over 100 tools and multiple offerings- from Principles to Frameworks, from Data and Ratings to Technology Tools. This ESG, Sustainability & Impact Measurement and Management (IMM) market is well over US$ 7 billion in 2020!
How can India use the G20 presidency to advocate for change?
During its G20 presidency, India should ensure global markets converge around how to manage the impact, measurement and management (IIM) markets. We must be able to get to comparable, empirical metrics, like earnings forecasts for corporations.
Impact-weighted profit and loss (P&L) accounts and impact-weighted earnings per share (EPS) should serve as a standard. The foundations of the ratings should be based on current and forecasted ESG/impact. In designing key performance indicators (KPIs), standards, and frameworks, it is essential to consider not only the Product, People, and Planet aspects, where revenues and costs are incurred but also the Policy dimension (the "G" in ESG), that shapes these outcomes. These four Ps—Product, People, Planet, and Policy— should be the holy grail of Capitalism 2.0, which our Earth needs for healing itself.
The recent Intergovernmental Panel on Climate Change concluded that human influence, if not dramatically altered, will trigger the Earth to breach the 1.5-degree global warming threshold by 2030. This could cause unprecedented climatic and ecological disasters. We have come together numerous times as a race to create change. The industrial revolution made goods cheaper, the creation of the European Union ended a cycle of wars and the technology revolution connected us in unprecedented ways. We now need an impact revolution that builds on the Buttonwood and Bretton Woods agreements. What can be more appropriate than enlightened capitalism in the land of Buddha? India has a shot at giving the world this moment in global economic history, to create global impact markets. Can we seize the moment?