ESG
Has it come its end?
Once the fetish acronym for companies, the term ESG has recently fallen into oblivion. Flora Harley explains why this concept needs to be brought back into focus and develops a new framework for action.
By Flora Harley, Head of ESG Research de Knight Frank
All at once everywhere is not only the title of the Oscar 2023 Best Picture winner, but also a clear summary of the current state of the ESG concept.
In a recent article in The Wealth Report, Liam Bailey quoted Hester Peirce, director of the U.S. Securities and Exchange Commission, who, in remarks made back in 2020, said of the ESG concept that "it's broad enough to mean anything to anyone."
The term, coined in 2005 by the United Nations, was initially intended to serve as a framework for measuring processes and results to promote transparency and accountability and to ultimately ensure that an equitable degree of sustainability is achieved. But somewhere along the way, something got lost in translation.
In a year that has seen the impacts of climate change hit hard as we move into what one study has described as "uncharted climate territory," the consequences of this lack of attention have never been more apparent. Amid increasing politicization and increasingly negative coverage, how can we restore interest in ESG criteria and convince UHNWIs -whose actions cause inordinate impact while also being subject to the broadest scrutiny- that they can make a difference while still pursuing their wealth goals?
Setting out some broad areas for action - anything beginning with the prefix "re", such as REimagining the ESG - can help reshape theory and counter skepticism, with a dose of tangible action. Here are five to get us started: REduce energy consumption, REcreate more RErenewable energies, REuse what we have, RErestore nature and REengage stakeholders.
It is also important to remember that it is not just about addressing everything, everywhere and all at once. As Voltaire said, "the perfect is the enemy of the good." Action, however incremental, is always better than inaction, and when combined with other things, great results can make a difference.
Beware of the gap
Reducing emissions is the thread that binds the five renewal actions of the ESG criteria. As the impact of climate change intensifies, the focus is also growing on the carbon footprint wealth gap, driven by the most affluent nations and, indeed, the wealthiest individuals, who play a much larger role in emissions than developing countries, which suffer the greatest consequences of climate change.
A report by Oxfam and the Stockholm Environment Institute states that the richest 1% of the world's population is responsible for more emissions than the poorest 66%. This gap is exacerbated by the fact that, while individuals with enormous purchasing power produce huge emissions, they can escape the most devastating effects of climate change through their mobility and ability to pay.
Wealthy families and high net worth individuals are increasingly committed to environmental responsibility.
Aside from their philanthropic activities, is there any evidence that the wealthy are trying to change their habits and narrow the gap? In short, yes. According to our Attitudes Survey, nearly two-thirds of high net worth individuals are trying to reduce their carbon footprint and one-fifth are trying to measure it.
"Affluent and high net worth families have an increasing commitment to environmental responsibility," says Maryann Bell of Wingspan, a company set up to maximize family unity, business success and societal impact. She sees "changes in lifestyles", although she warns that this "requires active will". Europeans are the most active, with three-quarters trying to reduce their emissions, compared to the Middle East, which is the least committed, with 58% aiming to reduce its emissions.
Change of lifestyle So what steps are UHNWIs actually taking? Let's look first at transportation: 40% of individuals with enormous purchasing power are switching to electric vehicles (EVs). The International Energy Agency (IEA) predicts a 36% annual growth rate for EVs, and this rapid adoption will affect property owners and investors, as charging centers near homes, offices and commercial establishments are increasingly in demand.
But not all transportation is changing in the same way: only 10% of UHNWIs plan to reduce air travel, and only 14% intend to reduce the use of their private planes. "This is the most difficult change, because of its efficiency and time investment component," Bell observes. "But there's more and more talk about offsetting those trips." Industry-wide change is also underway, with the first transatlantic flight using sustainable aviation fuel taking off in November 2023.
Investment decisions and business operations are increasingly seen as tools for emissions reduction, with around a quarter of the world's wealthiest companies selecting potential investments with ESG factors in mind. Greater application of ESG criteria for investment selection could mean that more capital is being allocated to sustainable activities and greater vigilance is being exercised over the impact of companies on the planet. Reflecting this trend, 30% of high net worth individuals are reducing the carbon footprint of their business operations. While family businesses typically do not require external capital and are therefore subject to less obligation for transparency, here too ESG criteria can be critical to business activity. "Family businesses embody and share family values," Bell asserts. "Environmental and social responsibility are among the principles that receive the most attention, and are recognized and conveyed as part of those values."
Two of the three most important actions for emissions reduction are improving the energy efficiency of homes and real estate investments. Going forward, we can expect more attention to be paid to the external elements of lifestyle and the carbon gap produced by the more affluent. In a more transparent digital world, Bell notes, "there is nowhere to hide." Action - or lack thereof - is becoming more visible and accountability more widespread. We can also see this reflected in the political arena: in January, the Young Socialists group in Switzerland collected signatures to put a proposal for a new tax on high net worth individuals to address the costs of climate change to a national vote.
The affluent will have to set their sustainability goals, driven by younger generations, and make adjustments in all aspects of their lives to achieve them. As Bell says, "it's becoming more prevalent in the conversation and, while they may not be as good as they could be, they are trying and are making active choices."