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Recently ascendant ESG momentum is now under strain from a perfect storm of events, report shows

· 5 minute read

· 5 minute read

A new report shows that after a period of ascendancy, the momentum behind ESG initiatives among companies and governments has recently come under strain

A nearly perfect storm of geopolitical, social, and economic forces has put the environmental, social & governance (ESG) objectives of companies, investors, and governments under strain this year — a situation that is likely to continue into next year, according to a new special report.

While some of these forces might be short-lived — such as higher energy prices (which have already begun to abate) — others, including the political polarization of ESG issues in the United States, are more difficult to gauge. The most powerful, disruptive force, however, is arguably Russia’s invasion of Ukraine, which created a pressing need to strengthen energy security and will likely require more fossil fuel extraction, at least in the medium term.

Existing international pledges to cut carbon emissions to net zero by 2050 were already challenging; but now, given the new reality, governments and companies are scrambling to balance their green-industry ambitions with these new imperatives of energy security and higher costs. The Russian war exposed all too clearly what was already known: many countries, particularly in Europe, are still strongly dependent on Russia’s oil and gas exports.

To examine these myriad issues further as well as their combined impact on ESG initiatives across the board, the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence have published a new paper, SPECIAL REPORT: ESG Under Strain, that digs deep into the current challenges governments and companies are facing on the ESG front.

For many citizens, shareholders, company executives, and government officials, the importance of the underlying principles of ESG has not diminished.

As the special report details, other stress points have emerged among those entities that in the past were leading champions of ESG issues. The world’s largest asset manager, BlackRock, reduced its support for U.S. shareholder proposals on ESG issues by nearly half in this year’s annual meeting season, as the firm voted for just 24% of them. The group had warned in May that shareholder ESG proposals were becoming too prescriptive, and that Russia’s invasion of Ukraine had changed the investment calculus.

ESG has also become a flashpoint for conservative politicians in the United States. Many Republican-led states have adopted measures that seek to exclude banks that support ESG policies. The controversy is not only climate change; social issues have also come under scrutiny, and many companies are being caught in the political crossfire. With the U.S. Supreme Court having overturned a decades-old law on women’s right to abortion, conservative states which support the Court’s decision are targeting companies that seek to help female employees obtain such health services.

Still, even against such headwinds there are notable positive developments in the fight for ESG recognition. There are already signs that Russia’s war is quickening efforts by Western governments, particularly in Europe, to reduce their dependency on fossil fuels. For example, Germany, Europe’s largest economy, agreed to a major package of reforms in July aimed at boosting the production of renewable power. That move allowed the German government to announce that it expects to end purchases of Russian coal and oil this year, and of natural gas by 2024.

In the United States, the Inflation Reduction Act was passed into law in August, and this new legislation includes $370 billion to support clean energy sources and speed the transition from fossil fuels. The new law is expected to accelerate private sector investment in renewable energy and help the United States meet its net-zero emissions pledge by 2050.

Meanwhile, ESG regulatory efforts in the EU, the UK, and the Asia-Pacific region are gathering speed as well, with numerous proposals on company climate disclosures already in effect or poised to come online either this year or next.

Of course, how these crosscurrents play out over the next year or two is difficult to predict. This report focused on two problems that affect all companies and should be on the agenda of boards and senior management: i) the growing efforts of regulators to stamp out “greenwashing”; and ii) the uneven pace of ESG regulation among jurisdictions.

Clearly, for many citizens, shareholders, company executives, and government officials, the importance of the underlying principles of ESG has not diminished. Indeed, the imperative for companies to earn their social license through the careful application of well thought out ESG initiatives, appears to be rising.

You can download the full report, “SPECIAL REPORT: ESG Under Strain”, from the Thomson Reuters Institute and Thomson Reuters Regulatory Intelligence here. (You can also find a British-language version of the report here.)

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