ESG Includes An ‘E’ And An ‘S’ – So Let’s Act Like It

By Hughey Newsome; forbes.com

Published February 28, 2023

The SEC’s proposed climate rule, set to take effect in April 2023, is indicative of how the world has prioritized climate change and environmental degradation. However, the principles behind ESG and sustainability require us, as society, to consider social-based risks, not just environmental-based risks.

There is an “S” in ESG for a reason.

In the proposed climate rule, there are roughly 99 mentions of the term ESG. The rule was crafted to standardize what investors had been requesting – how companies disclose their impact on and adaptation to climate change driven by greenhouse gases. The SEC observes that the U.S. Chamber of Commerce conducted a study of publicly traded companies across 17 industries, and it found that more than half publish information in some form under the pretext of Corporate Social Responsibility (CSR), sustainability or ESG. But the survey also found that less than half of the recipients who disclose climate-related information to the public do so in regulatory filings.

While the SEC’s climate rule focuses on a major factor associated with the “E” in “ESG,” what about social-based risks? These risks are more difficult to account for than environmental ones since there is no consensus on what to measure, which means there are fewer data sets available compared to carbon emissions. Moreover, social issues tend to be more of a lightning rod for political criticism.

But discipline is necessary. The concept of ESG arguably began in 2004 when then-UN Secretary General Kofi Annan wrote to more than 50 CEOs of financial institutions, imploring them to integrate environmental and social risks into investment making frameworks. In 2015, the UN adopted 17 sustainable development goals, which in theory were important for the sustainability of a livable planet by 2030 and beyond.

A lot of attention is paid to Goal 13, which states the world must take urgent action to combat climate change and its impacts. The goal’s stated premise is: “To limit warming to 1.5° Celsius above pre-industrial levels, as set out in the Paris Agreement, global greenhouse gas emissions will need to peak before 2025.” The focus on curbing greenhouse gases is merited, as the goal of mitigating carbon emissions to avert a climate catastrophe is not currently in reach. The world is not on track, per the International Panel on Climate Change.

While there are other environmental goals, this one has become paramount – partially thanks to ESG, which is a tool to measure risks based on climate change. As ESG has matured, it has provided a framework to assess how financial institutions and the companies they fund impact climate change, as well as the impact climate change will have on such investments.

But Goal 13 is not the only goal the UN agreed is necessary for a sustainability on earth. Indeed, goals 1-6, 8, 10 and 16 directly deal with how we as humans interact with one another and how we ensure a certain standard of living for all humans. This, along with the other goals, all collectively ensure that inequities that lead to conflict and oppression are avoided. More importantly, dealing with environmental-focused goals (like No. 7, 11, 12, 14 and 15) without dealing with human-based goals compromises the effectiveness of those environmental goals. For example, if we move the planet to renewable energy and avert a climate crisis without ensuring all people have access to the new system, then certain populations would either experience substandard living conditions, or revert to carbon-intensive energy and jeopardize the conversion to renewables.

This inextricable link is sometimes overlooked. It is part of the foundation of the environmental justice movement, which focuses on the inequitable impact of climate change and pollution on the poor and underrepresented communities. If those impacts are going to be lessened or eliminated, we must prioritize the impact on those very populations. Before the birth of the environmental justice movement in the last quarter of the 20th century, previous efforts focused on natural conservation and biodiversity, but they sometimes failed to address the inequitable impacts of environmental harms. The New Yorker posted a revealing story about the historic roots of the National Park Service and the Sierra Club, for example. John Audubon, for whom several Audubon organizations are named, had a history of extremely racist views (and many of those Audubon organizations have changed their names in the wake of the modern social justice movement, including one of which I serve on the board of directors).

It's a stretch to say the SEC climate rule ignores the plight of communities disproportionately impacted by climate change or other environmental degradations. Additionally, the SEC is looking to regulate existing disclosures to ensure investors have standardized, accurate information when climate change risks are provided by public companies. The SEC alone cannot prioritize developing the metrics, data sets, standards, technology, and educational depth developed to measure greenhouse gas emissions. The point of this piece is not to castigate the rule, as it is a badly needed step to require and normalize climate-based disclosures. Instead, this piece is meant to challenge all champions of ESG and sustainability. While the “S” has gotten some attention, we have work to do to standardize how we measure and report its impact.

ESG champions cannot forget about these social-based goals. If climate targets are met but inequities and oppressions continue to grow, the preservation of our standard of life still might be unsustainable.