ESG Tribalism: Who owns the transition — who is a specialist?

Thoughts on managing the ESG transition

Over the last year, I have been writing my dissertation on the ESG transition, which has prompted me to reflect on the tribal nature of the current ‘ESG movement’. This is at a time when we need collective action to make the transition a success. We must also avoid millenarist fervour and the claims by some that they own the ESG transition. Success is a broad church or temple, and we need a pragmatic marketplace for ideas and solutions with space for all. These are the foundations of a just and inclusive transition from which we will all benefit.

Norman Cohn identifies millenarian sects and movements as holding to an idea of salvation that has five distinctive features; it is collective, in that it is enjoyed by the community of the faithful, terrestrial, in that it is realised on earth rather than in heaven or the after-life, imminent in that it is bound to come soon and suddenly; total in that it will not just improve life on earth but transform and perfect it, and miraculous, in that its coming and will be achieved and assisted by divine agency.

The stage we are at with the ESG has many hallmarks of these millenarian sects. The risk is the transition will be undermined through infighting and alienation by those who deem themselves as ‘specialists’ or more ‘qualified’ in one aspect. The risk of the real collective being broken by relatively new entrants to the climate debate. The ejection of the long-time travellers in the climate, community, and societal sphere. Which is a fruitless outcome for all and will ensure a just transition is not achieved.

My observations are based on my study and consultancy which have allowed me to talk in-depth to many people worldwide who today manage the change required from ESG. People in the finance and services ecosystem, academics, government, and policymakers to the CEOs and CFO’s working in the ‘real economy’.

It has made me think of the paradox of change and who, if anyone, should own the change involved in the ESG transition. Unfortunately, it has led me aware of the trend of specific individuals or groups to negate the views and work of others in the ESG space. I think this is a by-product of the market’s laissez-faire nature, which has grown from the bottom up, a movement dominated by self-regulation and government cheerleading as opposed to what Tariq Fancy has called ‘refereeing’ and establishing a set of rules to manage the ESG transition.

The environment within which the transition is being performed has been greatly shaped by the financial crash of 2008. The crisis and the response were led to the call from technocrats for governments to use public money technocrats to support financial institutions and businesses which were “too big to fail’. In both Europe and the US this led to the policy of quantitative easing which has reshaped capitalism and led to a prolonged asset bubble which has left markets in a precarious state.

This move has had consequences both in political polarisation, hyper commoditisation of assets and a widening of the inequality globally. It is well documented that wage growth for the average person has stalled since the 1970s. While there is plenty of money system, there appears to be little money to fix wages, cost of living and investment in growth. While the root of the economic challenges is visible, policy makers appear unable to change them.

Change is difficult, but we need it to survive. History is a summary of the human reaction to change over the long term. It documents how we have adapted and transitioned to climate, war, technology in search of survival of our species. In most centuries as a species, we have not fared that well.

Change is the one thing humanity knows they must undertake, but to which they are resistant. Change brings uncertainty, the transition point between the old order and the new. The paradox is while we need change to progress, change costs. We need to change our thinking and cognitive response on a personal level. It is a process of discomfort which I think a lot of boards and business leaders feel when it comes to the ESG transition.

The transition requires reviewing systems, structures, and our way of thinking on a business level. To meet the challenges of climate, it is inevitable that high carbon impact parts of a business portfolio will need to change or be phased out. However, to decarbonise a business of its Level 1, Level 2, and phase 3 carbon, they must first be identified, measured, and then reduced. To do this, we need technology and investment from Silicon Valley, which may also invest in technology that many would think does not meet the ‘s’ in ESG. Here lies the paradox and complexity of ESG.

When even the smallest business resources its raw material and products across a global supply chain adds complexity. They do not control either the carbon or the social practices. To meet societal and cultural changes, such a business needs to adapt its hiring, remuneration and cultural approach and step up to own what goes on in the supply chain. When I talk with these real business owners they are willing, but their main question is how?

While B-Corporations have increased in number, capitalism’s objective remains profit. There is a choice between the shareholder and the stakeholder model, yet despite the willingness, as Tariq Fancy outlined in his essay, it is still complicated to demonstrate that ‘doing good creates value”.

I have taken the time to get my head around the demographics and the Generation Z’s, like my niece Lilly. This group and my children will inherit the planet, society, and the impact of our collective action or inaction to keep warming below the Paris target of 1.5 degrees. I, for one, was delighted to see Larry Fink going out and refuting the use of ‘woke’ when discussing ESG. I don’t know if Lily and Larry would get on well together, but they would agree that ESG is not ‘woke’. It’s about change and dealing with challenges we have known about for at least sixty years.

This emerging ‘tribalism’ within the ESG market is fascinating. However, I fear it risks undermining the progress we need to make on science-based targets and measures to improve society. I come from Ireland, where we dealt with the ‘troubles’ and religious hatred which were forces of destruction. We only reached the ‘good Friday agreement’ by finding pragmatic leaders willing to reach over the divide, come out of their tribe, and empathise with each other.

My working career has been in politics, renewables, oil and gas, corporate social responsibility, and capital markets, again very different tribal and different parts of the economy. I have lived in the middle east, a region, like the north of Ireland, marked with religious and community tribalism.

Back in the 2000s, when CSR was effectively a nice add on for companies, it was hard to capital allocated to CSR programs; there would be a couple of pages in the annual report. Companies didn’t know what to do with sustainability. It was like a hot potato. Companies threw sustainability into the health and safety department on the corporate organisation map. It was confusing for the many health and safety officers I met at decarbonising conferences in Westminster.

Where to put ‘sustainability’ and ‘Climate’ was reflected in government and the appointment of government ministers or junior ministers. Was it an environment or an energy issue? The brief of climate and carbon was not one for future leaders. These topics did not have any relevance to finance or economics, which are vital for the growth of a country. A politician on the ascent wanted these briefs to be considered for the big time and as leadership material. What is interesting as today, within ESG, the big challenge is combining non-financial data from carbon and society and the financial data to evaluate a company or an economy and how it is responding to the transition.

I remember there were pioneers in this space. One name that comes to mind is an individual called Anna Guyer, who ran a PR communications agency called the Greenhouse agency. I remember thinking, that is niche and interesting.

Working for Sony Ericsson with the mix of cultures between Japanese and Swedish was fascinating. When it came to CSR and environment, I learnt up close the pragmatic inclusive approach of the Nordics. Therefore, later in my career, when I was working for a sovereign wealth fund, I was not surprised that in that sector, it was the Norges Investment Bank (AUM $1.4 trillion) who were the rainmakers in the ESG space. Like the dutch they are pragmatic in their approach to developing their model of capitalism which integrates societal needs.

I was lucky enough to work for Nik Govier and Gerry Hopkinson, who were sharp on that intersection between business and society. From there, I was exposed to the work of Paul Polman and Unilever. As a CEO, Polman was fearless regarding CSR and ESG. As was Stuart Rose, who with Mike Barry and the team at M&S who launched Plan A. These were leaders willing to push an agenda that was unpopular with investors. The thread between them all was they looked beyond the balance sheet and instinctively knew that society and climate were important. At this time city analysts did not value, understand, or indeed (like today) know how to evaluate on a balance sheet. For investors such as Terry Smith, this is still the case.

What all these experiences taught me was that everyone has a different approach. We all suffer from cognitive dissonance. When we are taken out of our training or comfort zone, our impulse feeling is fear. When filled with fear, we can be tribal, and it brings out our worst reactions. We can make the wrong decisions. We don’t think of the collective. To back ourselves up, we ignore context and rely on our primacy instinct over the collective. We promote our ‘specialist’ position in a debate to enforce our authority, or entitlement whichever way it is perceived.

Therefore, context and history are critical in constructing a response to ESG market requirements. None of us are the first in tackling or reflecting on the planet’s challenges, societal inequality and the impact business has on both. All the people I have mentioned, I think, would agree that the climate threat and the need to act on climate is not new. Governments, businesses, and consumers have known and understood for a long time that to meet the challenges of environmental and social problems, we would need to respond to change. While factors external to ESG (Capital, fiduciary duty, the accountancy methodology, Milton Friedman theory on shareholder primacy) have impeded progress, the facts and the science have been available.

The first studies into the impact of industrial, economic, and human impact on climate go back to the 1930s and 1940s. The first green entrepreneurs and businesses emerged in the 1960s and 1970s, with some establishing global brands and changing our concept of the role of business in society. Just look at the work of Rachel Carson in the 19050s and the publication of her book ‘Silent Spring’ in 1962. The themes she raises then are the same ones for which the market is developing TCFD, TNFD and all the other frameworks to address today.

At a government and policy level, climate or global warming had been on the agenda since the 1980s, and the international coordination to reduce and then ban CFCs’ negative impact on the ozone layer. In our public consciousness, this global coordination was a pre-runner to the 1992 Kyoto principles (UNFCCC), which were the commitments made by governments to reduce co2 and greenhouse gases and expired in December 2020.

At the same stage through the 1980s to the early 2000s, we witnessed businesses focusing more on CSR and talking about their’ purpose’; as wealth inequality grew, a new wave of philanthropy emerged as private-led initiatives to find solutions to some of the planet and humanities global challenges. Which in many ways were a precursor to today’s “greenwashing” and overclaims of Net Zero targets and ESG reports.

The United Nations, with the support of the Harvard economist Jefferey Sachs — established the UN sustainability goals as a framework for business and government. These frameworks were tools help us to start identifying methods and ways to respond to our global challenges.

ESG is not new, is just a continuation of the same body of work; it is the next phase of CSR. Many of the CSR, Carbon specialists and environmentalists who I worked with and were outsiders fifteen years ago have gone into the banks and the big consultancies. Where they are no longer outsiders but at the centre of the strategic growth for many of these organisations.

The critical change to understand with the latest iteration with CSR or ESG is the financial sector’s involvement. Many long-term activists and generation Zs with whom I have talked with despise what they see as the ‘financialisation’ and ‘commodification’ of environmental and social issues they have campaigned. It is understandable that at COP 26 generation Z were heard to reject the climate commitments from governments and financial institutions as more BLAH BLAH BLAH. Their anger is aimed at the ‘elite’ represented by Wall Street banks and private equity firms filling the space. I understand this; they tell me this is the ‘Davos elite’ arriving in their jets to tell us all about climate change and how they will save the world.

Since Glasgow, the perception from activists is that these institutions that are promoting a millenarist fervour are grabbing the BLAH BLAH headlines. They feel the scientists have been pushed aside. The suspicion is that goal is not climate but to profit from both sides of the coin. They funded hundred years of carbon intensity, now they want to fund the process of decarbonisation. To some activists I have interviewed, the perception is they are leading a debate they have long ignored. Compared to the people who have marched for years for WWF, Green Peace, or their local community group, we cannot rewrite history; they are late arrivals.

Again, I understand the paradox, but it is an iteration of thought to how we respond to global challenges. It has taken decades for people to dare question the thinking of Milton Friedman view of the primacy of shareholder over all others. These are the iterations in thought and thinking that the ESG transition and requires. It is a global response to real global threats conducted in a polarised world. Yet our years of Hayekian thinking of small state small government have left governments weak to play that referee position which Tariq Fancy believes is needed to make the transition a success.

The positive is that after decades of climate and social issues not featuring in the minds of asset managers, investors, and analysts, these factors are now starting to work their minds around and indeed how to put a capital value upon. Again, although late, it is progress.

We will not move ahead by descending into nimbyism, localised, small-minded tribal views. The ESG transition is a long cycle, so we need to have long-term regulation and focus. We need long-term diverse thinkers in a world suffering from short term concentration.

We all need to be opened to change in our thinking if we are to adapt. We have imperfect regulation; the government operates on a short cycle and still seems unwilling to lead. The current carbon markets will not deliver for the net-zero targets; we need capital to make the change at pace. Many people reflect on the question about the involvement of finance in ESG and ‘should a banker be designing the future for the economy and society’.

Truth is we need many views from the top consultancies and investment banks. We need capital flowing to the new technologies and we need a constant flow of ideas from all demographics and parts of society. We need the long-term experience of activists and the scientists. We need the schoolteacher telling my children about turning off lights, how ladybirds grow and how to recycle. We need to be pragmatic and find leaders in each group of business and society who can reach across the divides. We need to engage across demographic lines, cultural groups, and areas of specialism.

The ESG transition belongs to everyone, and if we are to succeed, we can’t be tribal, we all need to be specialists. We need to accept we are still at the very start of this important journey.

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Jonny Mulligan

Jonny Mulligan

I work with companies and investors responding to the ESG transition.