While you were constantly refreshing your favorite news site’s election tracker to see if your party of choice took control of the US Congress this month, you may have missed that COP27 was taking place in Egypt. Some members of the international climate activist community, however, missed the conference for different reasons. Climate activist Greta Thornburg announced she would not attend, and renowned climate action group 350.org tweeted, “Those who’ve traveled across the [world] to fight for 1.5 degree Celsius CEL at COP27, and their communities at home, are sick of waiting as delegates avoid, delay, and greenwash.”
This exemplifies a distrust between the activist community and policymakers. Ironically, the principle of ESG was devised in part to avert greenwashing from corporations and financial institutions who determine the flow of capital either away from or towards activities that add to climate change and environmental degradation.
In February 2021, Shivaram Rajgopal, a fellow Forbes contributor, argued for requiring governments to provide ESG-based sustainability reports. Such a requirement could be very helpful in determining the aggregate impact of decisions made by government policymakers and would only improve if ESG focused data and standards improve. Note that in the EU there are currently initiatives to regulate based on ESG.
So we have policymakers who do not currently operate under the scrutiny of ESG who are making decisions that require a certain level of environmental risk assessment. They are constantly balancing short-term demands with long-term climate risks.
US President Joseph Biden ran for election on a pledge to end fossil fuel and issued an Executive Order blocking all new oil and gas drilling right after taking the oath of office; however, when inflation began taking a toll on American wallets and Biden’s approval ratings, he challenged oil companies to expand supply and signed the Inflation Reduction Act into law, which included a series of provisions that required the US Department of Interior to move forward on Trump administration-era lease sales for drilling the department had canceled in recent months.
Biden’s shift to compromising long-term goals with conflicting short-term priorities is not isolated. The year 2022 saw similar actions in other developed nations who have pledged to curb emissions and support the spirit of the 2015 Paris agreement. UK Prime Minister Rishi Sunak oversaw UK-headquartered Shell getting a significant tax break for drilling expansion. Sunak has received criticism for his authoring of a policy that extended tax breaks for oil companies, like Shell, that expanded drilling in the North Sea. This resulted in 91% tax breaks for drilling expansion costs, helping Shell to avoid a so-called windfall tax.
In Germany, the dependency on Russian natural gas for energy was supposed to be reduced as the nation transitioned to renewables and away from fossil fuels, including coal. However, as the war between Russia and Ukraine has drug on and the supply of natural gas has dwindled, Germany has had to reopen coal drilling in the short-term to address drastic energy shortages.
These three examples are driven by the short-term challenges recent macroeconomic and geopolitical forces have created; but they all conflict with long-term commitments to adhere to emission reduction commitments.
But how can the long-term focus needed to achieve the 1.5 degree target be achieved alongside the short-term challenges that policy makers must face? In the United States, the President needed to address the short-term inflationary challenges that dogged the first half of his first term or risk losing political power which could have limited the overall objective (note that the opposing party has repeatedly discounted the importance of international emission reduction agreements). In the United Kingdom, the original intent of the scheme crafted and pushed by Sunak was to provide funding to help poorer UK families deal with inflation. And in Germany, long-term focus on emissions reduction targets is difficult to prioritize over the need for energy during a harsh winter. Even environmentalists in Germany somewhat agree with the expansion of coal extraction.
ESG provides a framework to quantify risks and material impacts from the actions of financial institutions on society and the environment. Meanwhile, per Raigopal’s point, there is no way for society to get reporting of the impact of governments’ actions on the environment using some universally adopted standards.
Better yet, why are policymakers not held to this standard? As they say, what should be good for the goose should be good for the gander.
The investment community has shown the virtues of creating quantitative, objective methods to model impacts. In the policy-making world, we have organizations like the Intergovernmental Panel on Climate Change which model policies in the aggregate, but how do we consider individual policies, such as the expansion of drilling leases in the United States? More importantly, how do we get to transparent standards to have clarity in what the impact of these policies may be?
This vision will not happen unless the public demands it. But consider the awareness of ESG in the general public. In the United States for example, polling has shown a large level of support to avoid doing business with socially irresponsible companies; however, only 21% even know what the acronym ESG even means.
ESG, thanks to its widespread use in the B2B and finance communities, could be utilized to hold policy makers accountable even as its maturation continues. I would argue there is an opportunity to ensure nations avoid greenwashing – per Thurnberg – while increasing accountability and increasing the usage of ESG.
Besides, what else are we using to objectively hold our policymakers accountable?