Tobi Lutke, CEO of Shopify, Canada-based tech company took to Twitter to put up his opinion on ESG. Lutke approved of the idea, but he is not convinced of the current implementation. Calling it “broken, cynical and counter productive”, Lütke called for a “reboot”.
Retweeting Wall Street Silver’s tweet, Shopify CEO wrote, “ESG the idea is really good. ESG the current implementation is broken, cynical, and counterproductive. We need a reboot by people who understand systems design”.
ESG the idea is really good
— tobi lutke (@tobi) November 13, 2022
ESG the current implementation is broken, cynical, and counter productive. We need a reboot by people who understand systems design. https://t.co/3dzqmAHq2j
Lutke reacted to the ESG assessment that gave higher ranking to cryptocurrency exchange FTX than to Exxon Mobile Corp. based on leadership and governance. FTX entered bankruptcy protection amid reports that a related company used customer funds and hundreds of millions of dollars were moved in dubious circumstances.
What is ESG?
ESG stands for Environment, Social and Governance. It is a framework that help investors understand how a company is addressing issues around sustainability. It has evolved from historical movements that raised concerns on health and safety, pollution and corporate social responsibility. More precisely, it is the latest formulation of an older triad ‘People, Planet and Profits’, where people were prioritise over the rest two concerns.
ESG focuses on three themes for those who believe that capital should be invested in companies that fight climate change, considerate towards people and its relationship with them and seek for diverse leaderships teams.
Investors are leveraging these non-financial factors to note down risk and opportunities in their analysis process. Companies across the globe quickly responded to the increasing demand of investors by demonstrating their commitments to sustainable operations.
Meanwhile, regulators have also been churning out requirements that would compel companies to reveal their measure to control environmental, social and governance risks. ESG metrics are not part of financial reporting, however, organisations are increasingly publishing an independent sustainability report or disclosing the ESG ratings in their annual report.
Debate on ESG
Reasons behind the debate over ESG is mainly regarding the lack of co-ordination in global measurement, which has led to organisations making environmental claims not supported by sustainable actions. There are accusations that corporate decisions are being made solely on ESG concerns
ESG critics are from both the sides of ideological spectrum. Some dismiss the framework as a PR ploy arguing that corporate decisions based on non-pecuniary factors are unsustainable. There are also environmental groups who are taking measures against what is known as greenwashing. Complaints have been filed against Royal Bank of Canada and the Canadian Gas Association asking Canada’s Competition Bureau to compel watchdog to investigate ESG claims made by the two.
COP27 And Greenwashing
In a report, released by a commission convened by U.N. Secretary-General António Guterres at the COP27 United Nations Climate Change Conference in Sharm El-Sheikh, Egypt, rebuked companies for greenwashing. “If you’re saying to the world, ‘I am net zero,’ then there is a price of admission,” said commission chaired by Catherine McKenna, Canada’s former minister of environment and climate change.
“You need to walk the talk, you need to deliver on it,” she said. “The planet doesn’t care about intensity. It’s an important measure, but it cares about actual reductions,” she further added.
On the other hand, the COP27 summit itself is facing ‘greenwashing’ allegations from critics for multiple reasons. From host country’s alleged human right abuses to sponsorship by Coca-Cola, world’s largest plastic polluter in 2021, world’s largest platform for climate negotiations, is facing criticism.
ESG in The United States
There has also been increasing backlash, particularly in the United States, against investment decisions considering ESG factors. A CNBC survey reported that only 25 per cent of chief financial officers backed the U.S. Securities and Exchange Commission’s climate disclosure proposals, while 45 per cent of the respondents supported Texas and Florida to ban pension funds from investment considering ESG factors.
A report by Thomson Reuters Institute stated, “After a period of ascendancy, the momentum behind ESG initiatives among companies and governments has recently come under strain.”
“ESG has also become a political flashpoint in the United States, reflecting partisan differences and regional economies. While some states have issued extensive ESG mandates, others have adopted measures that seek to exclude banks supporting ESG policies on issues including climate change and gun control,” the report said.
What Experts Say?
Leanne Keddie, assistant professor of accounting at Carleton University’s Sprott School of Business agrees to Lütke’s opinion on Twitter. Keddie says that Shopify’s CEO “absolutely has a point”. “Many people seem to think… that somehow ‘good’ ESG leads to sustainability – there is no evidence that I am aware of that that is true,” she said.
“Until people wrap their heads around this distinction, we are going to continue to have confusion on this point. ESG ratings will continue to tell investors about the risks/opportunities they face on ESG topics but not on how a firm contributes towards a sustainable world,” Keddie added.
Charles H. Cho, professor of sustainability accounting at York University’s Schulich School of Business, said that a mini-industry has come up to measure and assess environment, social and governance impacts with a motive to mint money. That’s affecting the credibility.
“ESG ratings have evolved to become a product to sell,” he said adding that they “don’t really mean much.” He said that ESG ratings can be biased and misleading too.
Who Agrees With Tobi Lutke?
Those who have been following the issue quite closely approve of Lutke’s assessment. Experts believe that lack of standard measurement and terminology is the contentious issue in resolving the debate around ESG.
“There are many challenges,” said Tyson Dyck, a partner at law firm Torys LLP with a specialisation in energy, mining and infrastructure and climate change. He said that as data is provided by third parties, different companies face different problems.
“Some ESG-related metrics are not easily quantifiable. Some metrics may be meaningful for some companies but not others. Different companies may face different challenges in collecting relevant data, especially where data comes from third parties,” Dyck said.
