A moving moral feast

ESG definitions are fluid and the sacred boundaries of compliance are on the move.

Consider portfolio juggernauts in the oil and gas sector: one of the world’s most prominent producer of fossil fuels is now a leading developer and proponent of renewable energy. At which point do they cross the boundary from pariah to investor darling?

Consider the latest Dutch court judgment on Shell which is setting a global precedent: until now, corporates were fined for past demeanors, while this handcuffs future behaviour. Yet the question remains: where does corporate responsibility towards climate issues begin and end, and what is ‘lawful’ enforcement when ESG targets themselves not enshrined in law?

Shell announced that it would appeal the verdict because cutting emissions by 45% by 2030 will necessitate output reductions in energy sources still crucial to society when Shell’s own business model had planned emission cuts of just 20%.

Consider the shareholder’s plight. Funds investing in green initiatives and renewables pool investor cash, so their stakes are divide across dozens of businesses without specifically knowing which industry they are exposed to. In which case, they need to rely on the stated portfolio guidelines. But who ‘guards the guard’?

The main driver to ESG good practice should not be the fear of falling foul of compliance.

It should be a genuine gene in the corporate DNA to want to make a change.

Companies with the best ‘green’ intentions often fall foul of ‘subjective due diligence’, while those with massive carbon footprints slip through the net if deemed essential.

Shell’s example is equivocal. Although the company announced that it would invest in renewables and biofuels, it has stressed that it will only move “in step with society“. In response to that, the court ruled that the company should do more.

The teeth of ESG legislation remains a limited-vision due diligence, where 360 vision is needed. Corporates should be looking to:

  • Adopt internal and external behaviour underpinned by ESG principles

  • Lessen the ambiguity related to ESG policies by setting measurable actions for this new corporate culture

  • Be ahead of the curve in adjusting their business model in response to the climate challenges, so sustainable growth can be planned in advance

In a world still powered by fossil fuels, with a ponderous social inertia and a lingering scepticism on climate change, ESG initiatives are lagging on authenticity. So, for the foreseeable future, it will be the legislative ‘stick’, not the ethical ‘carrot’ which forces corporate change. And that needs unchallengeable law.

Contact details:

Lilian Filips
Lilian.filips@irconsultants.co.uk
www.irconsultants.co.uk