Why it’s time to reprioritise ESG to GSE

Professor Kevin Haines puts the G and S in the spotlight

If we are to meet the global challenges that fall across the broad spectrum of ESG – climate change, pollution, inequality – then we must be confident that the measures taken are going to have a tangible impact.

With this in mind, I want to suggest that we have got it wrong by referring to ESG in that order of priority. Instead, we should be framing our conversations and actions around GSE. 

We face an imminent global climate crisis – a crisis in E, which is why some argue that the E must come first. The crux of my argument is that the only way to have an impact on E and on climate change specifically, is to focus attention on G and S first.  Regulations within the EU Taxonomy centred on ‘do no harm’ principles are somewhat useless in the face of the scale and scope of the challenges we are up against here and now. 

The G in ESG is arguably the least developed facet and the one heard the least about. This is a mistake. There are two definitions of governance, one restricted and the other more expansive. The restricted version sees governance in terms of company behaviour and specifically a company operating with integrity and transparency – both inwardly towards employees and outwardly towards customers. 

The more expansive but less broadly used version of governance focuses on the activity of governance itself and whilst it includes the restricted version, it expands to include the governance of all human activity. For example, this would include governance of company behaviour, environmental safeguards, strong public institutions and justice, public safety and protection from harms, plus the role and activity of government itself. 

To match the scope and level of impact required to meet global ESG challenges, this broader understanding of governance is vital. Firstly, the restricted model of governance (even when it includes regulation) is limited to the financial sector and the regulation of investments (in companies and by investors). Notwithstanding the importance of this activity, it barely scratches the surface of the scope and range of the changes that are necessary to meet the ESG challenges that we face. Failed by a lack of ability, vision and strategy, too many governments around the World are fiddling while Rome burns. 

Secondly, if we are to make the changes that are required to achieve ESG-related objectives, governmental action is required. We need regulation across a very wide swathe of commercial activity (things like banning the use of plastics and fossil fuels) and this needs to be done with inter-governmental co-operation and agreement. 

We also need regulation and much greater international levels of enforcement to reduce the amount of criminal activity that impedes the achievement of ESG goals. Regulation alone, however, is not the answer. Whilst necessary, regulation is a poor motivator of behavioural change. Alongside regulations we need governmental action that promotes positive pro-ESG behaviour, making it possible for citizens to make the lifestyle changes that are required. 

This brings us onto the S in GSE – and to the interdependence of G, S and E. Humans are inherently social animals and the animals that have had the greatest impact on the world we live in. If we want to have a pro-GSE impact, we must change the decisions and actions taken by people. Only by doing so can we hope to bring about the behaviour changes that are required to meet current ESG objectives. The best investors and companies are already acting in this way. They are, however, too few in number and influence to bring about the scope of change required. Such companies are providing leadership and a roadmap, but we need many more to follow their lead. 

Our approach, both nationally and internationally, is spotty and largely ineffective at present. We are currently failing to achieve anything near the impact on E, S or G that is required to avert global catastrophe – within the finance industry but also more broadly across societies. This is a consequence of our E>S>G mindset. 

We need to change our thinking and we need to start to think G>S>E if we are to have the kind of impact that is necessary to have any hope of securing a prosperous, positive and peaceful future. 

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...