Why is ESG such a complex topic to discuss? Similarities and Compromise.

Can we Discuss ESG?

The fallout of the presentation from HSBC at the FT Moral Money event in London, reminded me of a quote from Theodore Zeldin “only when people learn to converse will they begin to be equal”.

The last few days has been spent discussing the reaction to the presentation and subsequent firestorm. The usual questions range from what it all means? Will it transform business and economies, or will the whole project fail?

This has led me to wonder “Why is ESG such a difficult topic to discuss?” Can we find the similarities in proposals and discussion, to find the points of compromise from which we can progress? or does the science based and society debate risk being derailed by culture wars or the reactive cycle for online outrage?

Where I’m coming from

I’m an optimist; there are a few market issues, and there are a lot of changes for CFOS, companies and investors. I think we will get there in the end. However, I feel many of our conversations lose meaning when they are conducted online, which is a disadvantage when discussing complex topics such as ESG. So, with the hope of providing people who are not ‘in’ ESG or want to learn a bit more, I’m sharing my current thinking and references and perspectives from people who I have learned from and are more versed in ESG. I have included the sources for people to carry out their own research.

Where do we start with ESG?

The difficulty comes from the translation of the term, explaining what it means and the reality of science. Many very committed people are trying to solve problems with the markets, the way we do things, and how we can make capital flow and achieve a ‘just transition’. It is a very technical conversation, which is hard to simplify in ten minutes or our online environment.

The term is broad

ESG stands for ‘Environmental, Social, Governance and is a term which goes back to the ground-breaking 2005 report, A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment. The report, produced by Freshfields, was for the UN EP Finance Initiative and associated with Professor Paul Watchman, who, I believe, is a real pioneer in this space. Learn more about him on this podcast from New Earth Lawyer titled ‘Big Law and the Big Greenwash’.

ESG can mean something different to many people

One of the day-to-day challenges is that ESG covers a broad church and space of topics, and when I say ESG, I mean the capital markets piece and financial disclosure, but it can mean many things for anyone else. For example, ESG can cover the themes of sustainability, impact investing, adaption, climate, biodiversity, inequality, diversity, gender rights etc. If you are interested in the themes or the science, I would follow David Carlin, the TCFD and Climate Risk Program Lead for UNEP-FI, who provide regular posts and online briefings and events.

Finance is not all bad.

One reaction to the HSBC presentation is the old line gets rolled out ‘finance is all bad’. I don’t see it this way. While I do have questions about the green bond market and the ESG rating system as a means to deliver impact, any questions or criticism I have are with the methods and the tools. Are the tools and frameworks effective and the best we have? On ESG ratings, there is another good paper called “Aggregate Confusion: The Divergence of ESG Ratings”, again from the University of Zurich.

Sticking to the science is key

I tend to think very science-based, i.e., if we aim to reduce carbon, climate, and damaging biodiversity, let’s do that. I am a massive fan of the work that the IFRS and ISSB are doing, but I wonder if we are creating a downward disclosure system that puts negative pressure on SMES and small-cap investors, which may act as a barrier to the transition.

Some in finance are leading.

There are institutions such as BNP Parisbas, led by Sebastian Soleille, who is doing some serious work around biodiversity. Likewise, I would encourage anyone to read the thinking of Craig Bonthron from Artemis, who provides an excellent article “Why do we ignore long-term problems?” which questions the lens through which we view ESG, the tyranny of the discount, and how GDP is a useless metric for our times.

The future thinking of finance is getting interesting

The future is bright, which is underlined by thinkers such as Julian F, Kobell from the University of Zurich and his paper on sustainable linked bonds “Who pays for sustainability? An Analysis of Sustainable -Linked Bonds” .

There are a lot of clever people in this space.

There is a large body of work in this area which I have found helpful. On the finance side, the most accessible is the Principles of Sustainable Finance by, Dirk Schoenmaker & Willem Schramade. For balance, it is good to see what Tariq Fancy Tariq Fancy the Ex-CIO of Blackrock has to say in his long read articles on medium ‘The Secret Diary of a ‘Sustainable Investor’. If you are a retail investor wanting to “do good’ but disappointed with ESG ETFS, then have a read of ‘Sustainable investment funds falling short of investors expectations’.

For me, context is key.

Our Biggest Experiment by Alice Bell is simply brilliant and provides excellent context from a technical, historical, energy system and all-around thinking as to how we got here. I could not put the book down, and it left me thinking about a lot of the challenges and choices we have today. However I learnt that many are not new and we have been through many of them over the last one hundred and fifty years. Finally, I read an older book from the 1970s, Environment, Power, and Society for the Twenty-First Century: The Hierarchy of Energy by Howard T Odum is a system view of energy and how nature rubs against humanity.

We are trying to change our methodology of valuation.

When it comes to economics and growth, one book I have read was Tim Jackson’s Post Growth Life after Capitalism, which was a good look at how we value our economic system and businesses. With disclosure changes, we are trying to change how we evaluate trade and economic activity. Jackson underlines that if we don’t change, what we stand to lose. I am a massive fan of Kate Raworth and her work with the Doughnut Economics Action Labs.

Understanding inequality

Via Thomas Pinketty, I came across a book by Lucas Chancel Unsustainable Inequalities: Social Justice and the Environment. This, for me, acts as a reminder of the negative impact on the people of the global south if we don’t take action. It makes the conversations around data, frameworks, IFRS, and ISSB not so abstract; there is a cause and effect.

It’s hard to debate with short messages on social media.

I believe that Jonathan Haidt’s analysis of what social media has done in the 2010s is correct. It has shattered any sense of shared meaning, and the ability to communicate has ripped the fabric of our society apart. His hypothesis is covered in an article in the Atlantic, “Why the past ten years of American life have been uniquely stupid”, and there is an interview with Brian Lehrer on WNYC podcast. Reading through the online reaction to the HSBC news, this point was really brought home to me.

Let’s avoid the ‘culture wars.’

I am a firm believer in debate and discussion. While I don’t agree with all aspects of the ESG debate or initiatives, I think engagement is critical, and winning the narrative is the only way I believe we make progress. One of my biggest fears is individuals from the technology and electric vehicle space weaponizing ESG into the ‘culture wars’ and talk of a ‘leftist agenda’, which I think will have a substantial negative impact.

Managing the debate: Similarities and Compromise

I am Irish, coming from a historical culture where to overcome the ‘troubles’, we had to learn to reach out to the ‘other side’ and learn how to identify our similarities and compromise on our differences. We would never have gotten to the ‘Good Friday agreement’ if we hadn’t. When presented with views I disagree with, I believe the onus is on me to work harder, to win the debate.




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Jonny Mulligan

Jonny Mulligan

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