ESG Goals: Expectation vs Reality

How remote management goes hand in hand with your ESG program

ESG has become a must-have for smart asset management companies. ESG assets under management have increased by 25% in the last 5 years.

ESG has become synonymous with responsible practices which is resonating with a rise in consumer and shareholder activism.

But, ESG is not just about promoting environmentally sustainable practices. A more accurate way to describe ESG, is that it is about companies using ‘Environmental’, ‘Social’ and 'Governance' principles to achieve business objectives.  

ESG is becoming a ‘must-have’, particularly for high risk and asset heavy businesses. ‘ESG’ itself can be complex and confusing. There are three main reasons for this:

1. No standard framework for measuring ESG objectives
2. Discrepancies in ratings from different agencies
3. Business can be worried about the reputational harm that they will face if they are accused of greenwashing.

No universally agreed benchmarks

There are a number of areas of contention around measuring ESG commitments against the organisation's goals. At the core of the issue is the fact that there's currently no universal metric on what you should be measuring and how to measure it.  

Critics have also called out ESG rating agencies, as the information and ‘rating’ of a business' ESG framework can vary between the different platforms, countries and much more.  

According to the article Aggregate Confusion: the Divergence of ESG Ratings a quantitative analysis of the Top 5 ratings platforms found key differences in the approaches across the board. There was no general consensus of what should and shouldn't be given deference. For example, a ratings platform may assess that good labour practices be given greater weight than lobbying indicators. Another platform may weigh safe work practices over board governance issues. This friction between the ratings agencies has potentially dire consequences for both businesses and consumers.  

What does this mean for consumers and businesses?

For consumers, it can make it difficult to check the ESG performance of companies, funds and portfolios. According to a US focused Gallup Poll, 57%  of US investors would consider companies ESG performance if offered through their 401(k).

Consumers want to know they can trust and understand the data provided to them – when there are discrepancies it may lead to a loss in consumer confidence.  

For businesses, the ratings can have dire consequences. The Article noted, that the discrepancies in ratings continue to make it difficult to rate the ESG performance within the  ecosystem.

Additionally, it decreases a company's incentive to improve their ESG performance by providing mixed signals about what is necessary. The danger in this is that it could lead to underinvestment in ESG improvements.  

Finally, it makes it difficult to link CEO performance to ESG performance. This could  amount to potentially disincentivising CEOs from taking a top-down approach to ESG.  

How this impacts you  

The inefficiencies of the ratings agencies impact all organisations committed to ESG principles. If there are discrepancies your assets may be devalued depending on how the ratings platforms work.  

To avoid some of the ramifications, most companies sign up to two ratings platforms. But it’s also necessary to build your own data to compare your models to the ratings on the platforms.  

You can do this by harnessing smart data to track your assets over time and focus on the goals most relevant to your business and industry. For example, in a physical asset heavy REIT you might want to focus on Labour Standards, including worker safety due to the high-risk nature of the work. Using an automated asset management platform like Asseti allows you to retain your historical data and provide insightful data, managing your assets from your desktop.

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