July 11, 2022 | Nick Holland
Back in the prehistoric times before Money20/20 Europe and the emergence of Crypto Winter (May 2022), an apoplectic Mr. Musk took to his megaphone of choice to vent on Tesla not making the cut for the S&P 500 ESG list. On Twitter, he berated ESG as a scam, “weaponized by phony social justice warriors.”
While he may have a point, that a company making electric vehicles isn’t listed, yet numerous companies that have been included have been directly responsible for generating greenhouse gases, (and arguably the reason for ESG ratings to exist in the first place), he is missing the bigger point — ESG isn’t all about the “E”. But why don’t we get the broader scope of ESG?
S&P provided a thorough explanation of why Tesla was dropped – first and foremost, the industry group in which Tesla is assessed (Automobiles & Components) experienced an overall increase in its average ESG Score. So, while Tesla’s score has remained fairly stable year-over-year, it was pushed further down the ranks relative to its global industry group peers. Other factors included –
S&P’s score is based on over a thousand data points, 130 weighted datapoints, and 30 weighted questions across all aspects of ESG, meaning that a company could excel in some areas, but be counted down heavily in others, hence Tesla’s relegation. Conversely, even oil companies or cigarette manufacturers can have solid ESG scores, despite the products and services that they provide being demonstrably harmful.
An ESG rating, when coming down to a single metric or score, is reminiscent of the number 42 in Douglas Adams, “Hitchhikers Guide to the Galaxy” — it represents the meaning of life, the universe, and everything, and is therefore when distilled down to a number, entirely meaningless. Similarly with ESG, a single metric doesn’t begin to describe the universe of information that it represents. So what’s the solution? A starting point would indeed be a common language and standards.
ESG is indisputably a very hot topic, and this was apparent at the recent Money20/20 Europe show in Amsterdam. Covering Environmental, Social, and Governance issues, the requirement for standards, and an understandable taxonomy were seen as critical areas for development, but so was the need for articulation and representation from the top of organizations.
In a session titled, “What would a standardized ESG framework in finance look like?”, Anna Krotova, Director of Sustainability, Mambu, articulated clearly the challenge of just now nebulous ESG’s all-encompassing wrapper can be for companies —
“I feel we're introducing a very wide menu of ESG topics, right? You're talking about climate change, biodiversity, human rights… there's a lot of issues that are wrapped up under the ESG criteria. But we are not introducing sufficient guidance to help companies actually navigate all of these issues, and what's material to them. So what are their most significant impacts? And what do they need to focus on? Because that creates a situation where ESG becomes about everything and nothing and that creates a lot of distrust and confusion in the market.”
In a separate panel discussion at the show, titled, ”It Ain’t Easy Being Green – How do we rebuild current financial products to be climate positive?”, Inas Nureldin, CEO and Co-Founder of Tomorrow Bank flagged that understanding of ESG needs to start at the board level where there should be true representation of ESG stakeholders —
“When you look at the board meetings of companies, and the people who sit at its board meetings, typically you have the big investors, like the VCs, you as a founder, still sit at the table, right? Which is very important. But there's nobody sitting there usually, especially in startups, that represents the workforce, your employees, and the environment, or, you know, the other stakeholders. And sustainability is all about taking care of other stakeholders that are usually not represented at a board meeting”.
Other discussions pertained to the requirement for an attitudinal shift for organizations around ESG. Erik Stadigh, Co-founder & CEO at Lune flagged that businesses need to consider the advantage of meeting consumer demand for ESG products and services, rather than focusing on the cost.
“I think one of the things that many businesses today still get wrong and why they're still so slow to act is because businesses see climate impact as a cost center for the business. Whereas actually, because of the consumer demand, because of the increasing business demand for these services, it's a massive commercial opportunity for businesses as well, to have a positive impact. And I think once more and more businesses come to realize that, that's when we'll start seeing a more pivotal change in the market.”
Indeed, this is true – ESG is a massive commercial opportunity. 2022 data from the World Economic Forum highlights the importance of sustainability in the importance of making a purchase. Three-quarters of Gen Z rated this as important, compared to just half who considered the brand name of a product to be important. Perhaps more notably, ALL age groups considered sustainability to be more important than brand, highlighting that ESG is not just a niche concern. ESG is a table stakes issue.
So, while ESG is seen as critical, even existential to implement, there is still significant work to be done in standard implementation and developing a clear understanding of what ESG is and isn’t from the top down. The danger being that a lack of understanding such as Elon’s “scam” moniker sticks if it isn’t negated by well-articulated, universal, and clear metrics. As Anna Krotova, Director of Sustainability at Mambu eloquently puts it —
“The last thing we want is for companies like Tesla disengaged with ESG really very early on because then we'll end up driving electric vehicles that are built on exploited workforces and degraded environmental resources.”
ESG is going to be a pivotal issue, not just in fintech and financial services, but to all industries, and all global citizens. Keep an eye out for our upcoming whitepaper on the topic, and for this to be a conversation that will extend as a key theme at our upcoming shows…