In this exclusive Q&A with Critical Resource, Lisa Sachs, Director of the Columbia Center on Sustainable Investment, discusses the growth of the ESG investor movement and the response of the extractive sector, arguing that incoherence within the broader movement combined with conflicts between ESG and climate change pressures has caused companies to underperform.
Incoherence in the ESG movement has led to some greenwashing
“Interest in ESG issues has grown hugely in recent years and we have seen concern for ESG performance become mainstream among investors. In response, there has been a proliferation of ESG-related reporting by companies. However, the lack of coherence in the language and frameworks used to measure ESG performance has led to confusion. There is little consistency regarding what is expected of companies, as a result of which some have been able to cherry-pick which standards or methodologies they use. A more coherent ESG framework with robust standards aligned with the Sustainable Development Goals is needed.
There is also a disconnect between the growth of the ESG agenda and on-the-ground outcomes. Some companies, while increasing their disclosure, have not made significant changes to their performance on ESG issues. Material changes, particularly in the critical areas of climate change, deforestation and human rights, are not being made quickly enough.”
The risks of poor ESG performance are greater than simply divestment
“The risk of poor ESG performance affecting valuations or causing divestment has been highly publicised. Another pressure point facing extractive companies relates to their downstream consumers. We are already seeing increasing concerns about how minerals are sourced and how they might be contributing to conflict. As climate change becomes more urgent, there will be much greater attention on the carbon intensity of companies’ products. Consumer-facing companies such as tech companies and car manufacturers will become more willing to distinguish between upstream providers that can minimise the carbon footprint of source materials and those that are more cavalier.
All of these risks combine to create regulatory risks for companies as there is greater pressure on policymakers to respond to ESG concerns. Companies should anticipate that laws will change – those that are already preparing will be better positioned for success.”
Miners can reconcile social and climate pressures, but oil producers face a huge challenge
“The International Resource Panel projects a substantial increase in the demand for metals and minerals to meet the requirements of the energy transition. This will necessitate the expansion of existing mines as well as the extension of mining into new areas. Mining companies should aim to minimise their own contribution to climate change as they produce the minerals needed for the energy transition. In thinking about how to power their operations, they should also explore how they can help to resolve energy deficiencies in the sometimes remote locations in which they operate, particularly by supporting the scale-up of renewable energy. Working to address these challenges can help to earn the support of local communities, building partnerships and trust.
The tension between broader ESG objectives and climate pressures is starker in the oil and gas sector as there is no room for hydrocarbons in the long-term future of the energy system. Fossil-fuel companies argue that their products are necessary to meet the current needs and demands of a growing population. But there has been no collective action by companies to think about how the remaining carbon budget should be allocated among producers, projects and countries. Companies are instead continuing to invest in new infrastructure. The countries that are only just developing their energy resources will lose again when the transition to a green economy occurs unless companies and especially governments address how to allocate the remaining carbon budget and account for equity considerations.”
The corporate response to climate change has been inadequate
“Companies have shown a remarkable willingness to both recognise the issue of climate change in response to shareholder pressure whilst simultaneously opposing regulations that would help address it. In the United States, many oil companies are spending hundreds of millions of dollars on political lobbying. Another example is the response of the banking sector to climate change – since the Paris Agreement, some of the largest banks have financed nearly $2 trillion of fossil fuels, increasing each year, despite corporate policies espousing their concern for climate impacts.
On the other hand, there are also some leaders in the sector who recognise the opportunity of being ahead of the curve in diversifying their portfolios and separating their companies from the laggards. Companies like Iberdrola, Enel and Ørsted (formerly Dong Energy) that have already divested from fossil fuels and invested significantly in renewables are increasingly attractive for investors as their business model will be less disrupted by the energy transition.”
Since joining it in 2008, Lisa Sachs has established the Columbia Center on Sustainable Investment as a leading research centre on investment in the extractive industries, investment in land and agriculture, and investment law and policy. In addition to her work at the Center, she served as Vice-Chair of the World Economic Forum’s Global Agenda Council on the Future of Mining & Metals from 2014 to 2016, and currently teaches a master’s seminar at Columbia Law School and Columbia’s School of International and Public Affairs on extractive industries and sustainable development.