background image

Larry Fink is wrong: we must keep talking about ESG

author image

By Daniel Klier

· 3 min read

BlackRock’s chief executive Larry Fink has blacklisted ‘ESG’, hoping to stick to its principles without the baggage the term has accumulated.

But sticking to principles means confronting challenges head on, not changing your badge.

As concerned as Fink and others now are about the partisan misuse of ‘ESG’, the debate surrounding it is one that needed to happen.

ESG was misunderstood by Wall Street long before it was misunderstood by Washington. ESG began with a very simple premise: more data for better informed decision-making, with the objective of enabling stronger investments, not pushing values.

But along the way, ESG as a concept drifted so far from this premise that market failures are close to occurring as a consequence. And while the conversation has at times been complicated, the fundamental issue in need of fixing is a simple one: better transparency.

A powerful example of this can be seen in the ballooning ESG ratings industry. Rather than enriching markets with transparent and granular data, they have in many cases served as little more than marketing wrappers, based on hidden methodologies often riddled with subjectivity, with no principles of financial materiality.

Yet they’ve ended up influencing the movement of trillions of dollars in investor capital.

Ratings are creating so much confusion, the rating providers themselves can’t clearly outline their purpose. If you asked them what their own score is for – risk, alpha generation, or impact – many couldn’t tell you.

Regulators, at least, are beginning to respond, with the UK and EU proposing ratings regimes that will introduce transparency of methodology and underlying data. But until these regulations are implemented and replicated globally, ratings will continue to be broken: undermining trust and fuelling Republican investigations into providers.

For ESG to truly live up to its original premise, we also need to make ESG data as abundant as financial data. Just as we see granular information on everything from a public company’s debts to its investments, we also must get the full picture of non-financial factors. Not just emissions and other environmental details, but exposure to commercial and reputational risks as varied as diversity, labour practices and tax governance.

But a scarcity of corporate disclosure is stopping this from happening. There is a regulatory solution, establishing clearer disclosure frameworks. To this end, the International Sustainability Standards Board’s new standards have the potential to establish harmonised global standards.

And there is a technological solution, using platforms to break down the traditional barriers between companies and investors, to enable collaboration, dialogue and to move beyond annual reports to establish a real-time feedback loop. This technology already exists, but more corporations need to use it.

The ESG market must be prepared to embrace its own faults, find its own solutions, and define its own name. If we all followed Larry Fink and decided to stop using the term ‘ESG’, it would only embolden those – such as the anti-ESG elements of the Republican Party – that want to turn a powerful tool for better investment decisions into a political lightning rod.

Changing the name of a conversation will never change the topic. If the market can’t fix its faults, political controversy will continue to follow, regardless of what we call ourselves.

If we get it right, ESG will swing from a culture war topic to a bipartisan issue to which all will agree. After all, better data will always lead to better-informed decisions. But we can’t do this by changing ESG’s name. We can only do it by changing ESG for the better.

This article is also published on FN London. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

Did you enjoy this illuminem voice? Support us by sharing this article!
author photo

About the author

Daniel Klier is CEO of ESG Book and HSBC’s former global head of sustainability.

Other illuminem Voices

Related Posts

You cannot miss it!

Weekly. Free. Your Top 10 Sustainability & Energy Posts.

You can unsubscribe at any time (read our privacy policy)