Neither love nor money: setting standards for ESG

While environmental, social and corporate governance (ESG)-linked pay and bonuses are increasingly popular in big businesses, the concept found a lack of support among two recent visitors to Intelligent Insurer’s hub for debate and discussion: Nir Kossovsky, head of Steel City Re, an insurance intermediary and risk advisor for reputation and ESG linked reputation risk; and GCY Associates’ founder Gerald Chen-Young, who specialises in institutional investment management, consulting and advice, and has worked with several boards on ESG issues.

A big part of the problem is reconciling the breadth of the concept with the specifics of each company. As Kossovsky noted, the ESG acronym was established by the launch of the UN’s Principles for Responsible Investment in 2006, but it evolved from the earlier rise of reputational risk, which by that time was established as the “risk of all risks”.

“We thought that was a terrific characterisation—reputation being the overarching notion of the relationship between many stakeholders and the underlying firm,” said Kossovsky. ESG shares many of the same characteristics, and the difficulties in boiling it down to a few performance indicators to link to pay are numerous.

For one, there will be the temptation to game the system and set goals with little real-world impact. “Greenwashing would be the first thing that bubbles up,” said Kossovsky.

There’s also little agreement, even in broad terms, about what good looks like. “In the US, there tends to be a greater emphasis on the ‘S’ and the ‘G’ components of ESG, whereas in Europe the emphasis seems to be little heavy on the ‘E’,” said Chen-Young.

It is not simply that priorities differ—they can conflict: see the current return to local fossil fuel in Europe to avoid supporting Russia’s economy by purchasing its energy, said Kossovsky.

Global and local: a combined effort

Despite the difficulties, however, concrete standards and measures are needed if ESG goals are to be universally adopted. Kossovsky points to controversies over rating agencies’ attempts to quantify ESG performance as an indication of the difficulties in setting metrics. For example, S&P 500’s ratings of the best performers prompted Elon Musk to declare that “ESG is a scam”.

However difficult, such efforts and internal can be valuable, according to Chen-Young. If companies are rated for their financial statements, part of it could include a measure for ESG performance, he suggests.

“It is not a pure science, but it might be assigned some sort of grade on how a company’s performing,” he said.

Likewise, the internal audit could encourage rigour in the implementation of ESG programmes. “The more ESG is absorbed into the audit process for those things that are verifiable or measurable, the more the audit can be a check and balance to see whether the company is living up to exactly what it purports to,” he said.

“Annual audits and ratings are perhaps good starting places for creating a quantifiable set of metrics.”

There is a whole range of organisations at the national and international level that can help standardise and promote rigour in companies’ ESG adoption.

“It’s a combination of multilaterals such as the United Nations, the World Bank and the IMF, but also a function of the domestic regulatory apparatus, such as the Securities and Exchange Commission in the US and Financial Conduct Authority in the UK,” said Chen-Young.

However, none of that detracts from the responsibility of each firm to find its own way, focusing on the issues and risks that matter to its business. Multilateral organisations can set “aspirational goals” to encourage companies to buy in to the concept, said Kossovsky, but company-level goals require the internal understanding of its capabilities and the unique expectations of its shareholders.

According to Kossovsky, it is only through combining the “big picture” from multilaterals with the granular details specific to each firm that a global movement can see effective local implementation.

Or, as Chen-Young explained, it requires common expectations but individual applications.

“I’m not sure what the forum is, but I think we need to have a universal standard that we get buy-in for,” he said. “Until we achieve that, we’ll continue on this path of going back and forth trying to quantify things that are not meant to be quantifiable.”