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Can Global Regulators Save the ESG Movement From Itself?

Without state intervention and global standards, the environmental, social, and governance movement is a recipe for greenwashing and corporate deception.

By , chief markets officer and chief risk and sustainability officer of Microshare and a lecturer at the University of Denver.
A Greenpeace activist sprays green-colored water at the entrance of the European Parliament in Brussels on May 26, 2021.
A Greenpeace activist sprays green-colored water at the entrance of the European Parliament in Brussels on May 26, 2021. KENZO TRIBOUILLARD/AFP via Getty Images

It has been two months since the 2021 United Nations Climate Change Conference, or COP26, ended in a plume of promises, pledges, and finger-pointing.

Few left satisfied, and if a show of united resolve was the point of it all, it was a failure. “Change is not going to come from inside there,” climate activist Greta Thunberg said. And she was right.

With Glasgow’s gloom in the rearview mirror, practical campaigners are turning back to national governments, which for better or worse are the still the creators and guardians of binding, enforceable laws and regulations. And here there’s a bit more hope, as financial and environmental regulators in the United States, European Union, and world’s other major market economies are moving to standardize the way progress—and prevarication—are measured.

It has been two months since the 2021 United Nations Climate Change Conference, or COP26, ended in a plume of promises, pledges, and finger-pointing.

Few left satisfied, and if a show of united resolve was the point of it all, it was a failure. “Change is not going to come from inside there,” climate activist Greta Thunberg said. And she was right.

With Glasgow’s gloom in the rearview mirror, practical campaigners are turning back to national governments, which for better or worse are the still the creators and guardians of binding, enforceable laws and regulations. And here there’s a bit more hope, as financial and environmental regulators in the United States, European Union, and world’s other major market economies are moving to standardize the way progress—and prevarication—are measured.

Carbon footprints measured by emissions are a key metric, of course. But the focus of regulators such as the U.S. Securities and Exchange Commission (SEC), the U.S. Federal Reserve, the European Central Bank (ECB) and many others is a broader and more empirical formula than the tally of emissions cuts. The so-called ESG movement, which seeks to incentivize good behavior by rating the environmental, social, and governance behavior of companies, government agencies, and other entities, is at the center of these efforts.

The global regulatory pace for curbing what climate and sustainability activists call “ESG bullshit” has picked up.

The movement’s impact is large and measurable in dollar terms. Corporations around the world have launched major, multi-billion-dollar ESG initiatives that—on the surface at least—aim to improve their performance on a wide range of environmental, social and governance metrics. Investors have redirected trillions away from firms with poor reputations or carbon-intensive business models. Yet the lack of a standard methodology for measuring things such as “labor relations” or “supply chain diligence” has muddied the water and made the movement susceptible to false claims of “greenness” that make no real impact.

In the footsteps of the European Union, which enacted the Sustainable Finance Disclosure Regulation (SFDR) in 2020, the global regulatory pace for curbing what climate and sustainability activists call “ESG bullshit” has picked up.

From a regulator’s perspective, such “greenwashing,” as the marketing strategy has become known, is akin to a conspiracy to defraud investors. Greenwashing is when a company with a history of environmental damage, such as BP, decides to change the color of its logo to green and put some happy icons of the sun on it, all while leaking oil into the Gulf of Mexico and working feverishly to ensure the carbon-intensive economy (its raison d’etre) persists well into the 21st century.

Concerns that well-meaning investors are being misled has lit a fire under regulators. In the next few months, the SEC and Britain’s chief financial regulator, the Financial Conduct Authority (FCA), will finalize rules governing claims made by banks, asset management firms, and other financial entities regarding what they can categorize as “green” within their portfolios.

In 2022, this regulatory moment will jump from Wall Street to Main Street. The U.K. Competition and Markets Authority (CMA) is also acting, publishing a Green Claims Code and warning of an upcoming sweeping review of misleading green claims such as “all-natural,” “free trade,” or “GMO-free.” While the CMA has not singled out any brands yet, its review is likely to resemble the annual “worst abusers” lists produced by environmental activist groups such as Earth.Org. Prominent repeat offenders include global giants like Nestle, Starbucks, Zara, H&M and Coca-Cola.

This is becoming a global pattern. When European regulators took on data privacy in 2016, passing the General Data Protection Regulation (GDPR), U.S. companies and others outside Europe found that ignoring the new data regulations would risk their access to the EU’s market, a consequence too big to ignore—and thus they had to concede that the EU has a supranational ability to enforce compliance.

Not long afterward, state regulators in California, another trend-setting jurisdiction, followed suit, passing the California Consumer Privacy Act (CCPA) in 2018. Since then, seven other U.S. states have passed their own versions of the act, and bills replicating the GDPR—often aimed at curbing the power of Big Tech—are making their way through the U.S. Congress.


In the coming year, the focus of regulators’ attention will move beyond the spurious claims of financial firms marketing funds of dubious greenness to corporations pursuing dubious marketing campaigns in attempts to greenwash their brands. The SEC, unlike EU regulators, has broad jurisdiction not only over markets and brokers (via its Financial Industry Regulatory Authority arm), but also over the conduct of corporations, which must file annual reports with the commission.

Regulators’ new focus is on ESG data. Claims of “greenness” aside, there is widespread recognition among ESG proponents and critics alike that the metrics being used to make judgments about the sustainability credentials of a company or investment vehicle are wildly inconsistent. As a result, there is a new focus on bringing some standardization to the metrics that companies disclose annually to the ESG ratings industry, which is currently completely unregulated since the disclosures themselves (except within the EU) are voluntary.

Speaking last summer before the SEC’s Asset Management Advisory Committee, SEC Chairman Gary Gensler said “investors should be able to drill down to see what’s under the hood” of asset management funds and a standard approach to metrics and terms such as “green” or “sustainable” needed to be enforced. There has also been talk from another SEC commissioner, Allison Lee, of linking executive pay to ESG performance, a prospect that terrifies the corporate sector.

There is a new focus on bringing standardization to the metrics that companies disclose annually to the ESG ratings industry, which is currently completely unregulated.

In September 2021, the SEC’s investor advocate told Congress the commission intended to address two problems with new regulations likely to appear early this year. The first issue is that information provided by companies for ESG disclosure “tends to vary in quality” and is not standardized to allow for comparison. The second issue is the need to enhance disclosure requirements regarding “climate-related risks and opportunities” and “human capital management”—the ironically dehumanized financial lingo for how companies treat workers.

Meanwhile, the U.S. House of Representatives passed an ESG disclosure bill in June 2021, and Brussels had continued its regulatory crusade, with the European Commission now working with various reporting bodies to develop mandatory ESG reporting for roughly 49,000 large companies operating in the EU or listed on its stock exchanges. The standards for this reporting will be published this year and likely take effect in 2023.

If this rulemaking trajectory continues, it will supercharge ESG ratings as an important window for the public into the behavior of giant corporations. Furthermore, it will provide governments with leverage to prod the corporate engines of the global economy toward the net zero promises made in Glasgow. Specifying the content of corporate disclosures and how they should be made will expose laggards to negative share price pressure, divestiture by institutional investors, and reputational damage and possible consumer boycotts.


Companies feel compelled to disclose data on their ESG performance for three main reasons: investor sentiment (reflecting a progressive change in values that is part of the demographic shift of wealth from values-neutral boomers to more activist millennials); resilience (recent financial and academic studies suggest that companies that rate well on ESG metrics are more resilient in their long-term financial performance); and market performance.

Naysayers, and there are many, object to the ESG movement for several reasons. One camp is the Hayek-Friedman-Greenspan fetishists, also known as the Chicago School in economic circles. While they have a diminishing in influence on policy, these market purists remain a powerful force in London and on Wall Street, as well as on the political right.

“For the better part of a century, the Left has been waging a slow, methodical battle for control of the institutions of Western Civilization,” writes Stephen R. Soukup, author of The Dictatorship of Woke Capital and a harsh critic of the ESG movement. “During most of that time, business—and American Big Business, in particular—remained the last redoubt for those who believed in free people, free markets, and the criticality of private property. Over the past two decades, however, that has changed, and the Left has taken its long march to the last remaining non-leftist institution.”

On one level, the Chicago School kids have a point. There is a decidedly “drink the Kool-Aid” feel to the rhetoric of the ESG movement, which shares a brittle intolerance to dissent with the larger woke movement.

In 2021, Nike found itself in the crosshairs of both human rights groups and ESG analysts focused on the alleged existence of slave labor, child labor, and other abuses in its supply chain.

Beyond ideological objections, there are those pointing to practical concerns. Many Western businesses, for instance, find that after the late-20th-century surge in globalization China is not only a manufacturing base but also an increasingly important market for their goods and services—which can sometimes cause problems when it comes to Western standards.

In 2021, Nike found itself in the crosshairs of both human rights groups and ESG analysts focused on the alleged existence of slave labor, child labor, and other abuses in its supply chain. Nike says it has done all it can to ensure it is free of such abuses. Much of the controversy centered on slave labor in China’s restive Xinjiang, a cotton-producing region where the Beijing regime has locked up more than a million Uyghur people in a sprawling reeducation and forced labor gulag.

For Nike, this scrutiny posed a huge dilemma: China is not merely a part of its supply chain but also where the company makes over 20 percent of its global revenue. Eager to address and dismiss the Xinjiang slave labor accusations without angering China, Nike’s CEO John Donohoe managed neither during the company’s fourth quarter earnings call. Nike is “a brand that is of China and for China,” he said, among other things. This elicited a sharp response from activists, and also from then-U.S. Vice President Mike Pence, who accused Nike of “kowtowing” to Beijing and putting profits over American values.


The Nike incident is also a timely reminder that ESG is not a synonym for climate impact, which makes up only a portion of what ESG ratings seek to measure. The social and governance components seek to measure corporate behavior on issues such as labor standards, health and safety policies, gender and racial diversity, income inequality, and transparent governance.

To date, even in Europe, where the SFDR regulations only took effect on Jan. 1, ESG disclosures have been voluntary actions in response to investor demand and a concern for (or desire to manipulate) brand reputation. Mostly, these disclosures are responses to voluminous surveys sent by ESG metrics firms, a constellation of research and ratings outfits that make up a cottage industry of Wall Street players and others such as MSCI (owned by Morgan Stanley), Trucost (owned by S&P Global), and Refinitiv (owned by the London Stock Exchange).

To some, the ESG metrics industry, which topped $1 billion in revenue this year, looks a lot like the industry that rated mortgage-backed securities back in the early 2000s, when supposedly disinterested bond ratings agencies (Moody’s, Fitch, and S&P) were hired by Wall Street banks to rate their mortgage-backed securities offerings. Virtually all the offerings wound up with AAA+ ratings, sparking a financial crisis when many turned out to be junk. Not surprisingly, the parallels have regulators worried.

What’s more, in the ESG industry’s rush for customers, firms have naturally tended to take proprietary approaches to their ratings, all claiming to have the best algorithms. These algorithms sometimes create wildly disparate results for the same company’s performance and apply methodologies that don’t necessarily conform to the moment.

A study by MIT’s Sloan School of Management found that differing methodologies make nonsense of the idea of rating a firm’s performance.

For instance, public and market awareness of the social component of ESG has been transformed by the COVID-19 pandemic, as worker-employer dynamics have shifted and people have become aware of the importance of the safety of indoor working environments. Should an office that installs smart building sensors to monitor air quality be rewarded? What about a meatpacking plant that invests in HVAC upgrades for better ventilation? Unfortunately, these vital moves to secure and reassure workers will not necessarily be captured by current ESG methodologies.

The results of these inconsistencies can be problematic. Some ratings firms, for instance, categorize natural gas producers as somewhat green due to the vital part natural gas has to play in the net-zero transition period. Others see them as carbon economy villains. Wells Fargo bank garners low ratings from many ESG data firms because of deceptive business practices that in the past led to steep fines for its home lending and retail banking operations. Yet in 2020, the bank won an award from S&P for “sustained excellence” in its approach to the environment after entering into a long-term energy contract with companies that have solar and geothermal energy in their supply chains.

A study by MIT’s Sloan School of Management found that differing methodologies make nonsense of the idea of rating a firm’s performance. Since investor pressure is the engine of change in ESG theory, the divergent signals that ratings firms send blunt and even prevent progress. “Improving scores with one rating provider will not necessarily result in improved scores at another,” the study’s authors wrote. “Thus, ESG ratings do not, currently, play as important a role as they could in guiding companies toward improvement.”


None of these concerns and inconsistencies have halted the ESG industry’s growth of both revenue and importance.

Liesel Pritzker Simmons, co-founder of Blue Haven Initiative, an impact investment fund that aims to generate returns and also positive social and environmental change, told me that, to her, the squawking over ESG data is just another effort to discredit sustainability. ESG metrics, she said, were a starting point for research, not a Good Housekeeping Seal of Approval.

“I often feel like [investors] want it to be easier; they want somebody to come out unequivocally and say, ‘This company is better than that company,’” Pritzker Simmons said. “Ratings are fine, it’s a place to start, that’s where you start the conversation. But being an impact investor means you have to look under the hood of what those ratings mean.”

Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, the world’s largest asset management firm, is not convinced. He argues that the ESG industry’s lack of oversight has turned it into a marketing strategy and a way for financial firms to earn additional fees without having much real impact on the real world.

Avoiding investing in the world’s worst carbon emitters or labor rights abusers is useful, Fancy said, but hardly a silver bullet for the climate or society. The fact is, at the other end of every trade in which Exxon or Halliburton shares are dumped is a counterparty happily buying.

In keeping with its current timidity toward anything that looks like global governance, the United States is keeping its distance from the ISSB.

“No matter what they tout as green investing, portfolio managers are legally bound (as well as financially incentivized) to do nothing that compromises profits,” he wrote in a widely debated article. “I believe we are doing irreversible harm by stalling and greenwashing. And all in the name of profits. … To fix our system and curb a growing disaster, we need government to fix the rules.”

One of the most significant, but largely unnoticed, developments to come out of the COP26 summit may begin to address this concern: the creation of a global consortium of financial regulators that will tackle the question of ESG data standards.

The new body—the International Sustainability Standards Board (ISSB)—will have the jurisdictional muscle of national governments behind it. Unfortunately, in keeping with its current timidity toward anything that looks like global governance, the United States is keeping its distance. It is possible that the Biden administration could choose to join the ISSB before its tenure runs out, but it’s equally possible that another Republican-led White House philosophically opposed to any foreign voice in U.S. lawmaking could seek to undo what progress has been made.

“There’s a crowd, and not a small one, that objects to anything that suggests a company should care about anything but profits,” said Indranil Ghosh, an ESG investor who advises and raises money for sustainable initiatives.

“Of course, that kind of puritanism is exactly what created the hyper-partisanship, climate emergency and income inequality we see today. The ESG movement is all about harnessing the enormous power of the free market to make progress on multiple fronts. It would be a shame if it were free-market zealots who derail it.”

Michael Moran is chief markets officer and chief risk and sustainability officer of Microshare and a lecturer in political risk at the Korbel School of International Studies at the University of Denver. Microshare produces ESG-relevant data for some of its clients.

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