The notorious ESG: business, climate, and the race to save the planet podcast

Transcript

The notorious ESG: business, climate, and the race to save the planet

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Thomas Felix Creighton (TFC): Hello, welcome to the Emerald Podcast Series. My name is Thomas and my guest today is Vasuki Shastry, the author of The Notorious ESG: Business, Climate, and the Race to Save the Planet. He has spent many years at the environmental, social and governance coalface itself, running ESG for major international banks of the City of London, and as a former Associate Fellow in the Asia Pacific program at Chatham House. Thank you very, very much for joining me today.

Vasuki Shastry (VS): I'm delighted to be here.

TFC: I guess, as you wrote the book, the notorious ESG, I must ask you, first of all, what does ESG stand for?

VS: I think in the current context, of course, yes, it stands for many, many things. But let's get back to basics. ESG stands for environmental social governance. It is a collection of standards, metrics, and KPIs, you can vary. It's very much a business buzzword, which essentially provides investors and the society at large, I guess, a set of indicators on how a particular company is doing across these three pillars. And obviously, ESG, very, very specific, it is data driven, and evidence driven, compared with other formulations we are seeing in the business world, for example, a lot of people talk about sustainability. And people seem to use sustainability and ESG interchangeably. But I think it's useful to emphasise that they are interrelated, but they are somewhat different. In my book, sustainability is all about a company's commitment, or articulation of its real positioning as a responsible business company, setting out doing the right thing across environmental, social governance factors. And there could be other factors, obviously, financial sustainability, is critical for business. So sustainability is a commitment. It's an articulation of what companies stand for. And that's why you see a lot of linkages between sustainability and purpose. For example, whereas ESG really is the validation is the evidence, tangible evidence, that what the company is articulating in its sustainability framework? The company is able to evidence to data and facts, right. So I think this is a very important distinction, that that kind of gets lost in all this noise, that we tend to hear about what he is all about, and what sustainability is all about.

TFC: Thank you very much for explaining that. And this will be something hugely familiar to some and really quite unknown to others. And I think it's an interesting question, how do you put a number on, for example, social responsibility?

VS: Yeah, I think a lot of companies have struggled with this over the years. But you know, at the end of the day, you can almost put a number on the metric against any business indicator. One example, let's take a large, multinational, High Street, garment distributor bike you got you got many of them and in London and all over the world. Now, where do they source their garments from? They typically traditionally sourced this from developing countries. The reason for this is, you know, wages are low. Production costs are significantly cheaper, they're able to keep the cost of production down and sell it to the general public, at a significantly lower price compared with producing it in Europe or the US. One very, very common metric that you can use on the social side, which referenced is how many people do these companies actually use in Bangladesh, Sri Lanka, or Cambodia? Right. So if you have a manufacturing facility, say with 1000 government work, then you immediately begin to drill down and try and figure out metrics, how much are they paid? What are the working conditions? What are the safety standards that this company is implementing, and we've had some horrific tragedies in the garment space, and that really is particularly in Bangladesh over a decade ago, but really focused attention on building better social metrics. So that headquarters can understand that if for some reason has happened in Bangladesh, the owner of that garment factory shut all the doors of the window If you can take timely action. So I think, in any metric of business, you have to look at the facts, you have to look at the heart data. And anyone who says, and I've heard a lot of this commentary that easy to build metrics on the environment inside the load of qualitative judgments to be made on the governance side, which I think is a fair point, that it's almost impossible to build metrics on the social side. And, you know, I kind of reject that thinking.

TFC: It's a very interesting example, with the garment business, because that's something where the, the consumer, the end consumer can have a direct effect on the business. And they can be influenced by say, as they regard the morality of the business. That's quite unusual, isn't it?

VS: But this is certainly you know, you've seen the convergence of greater consumer focus on, for lack of a better definition, be on socially committed products in the sense that they want to be associated with brands that they believe are doing good, and really, truly are a positive force in this world. And, you know, you amplify this via social media, right. So if you've got a consumer on the high street, who feels deeply aggrieved buying a certain product, who he or she feels, was not produced sustainably, this person can take the grievance and the case in the public space via social media, and amplify this and get lots of other support from other consumers. So you know, consumers really are the centerpiece of how consumer products are sold, branded, and reputation built on these days. So companies that therefore are very, very focused now on what they would describe as sustainable sourcing, they take a great deal of pains to emphasise where a particular client didn't go to a coffee shop. There's a lot of posters on where these coffee beans are produced, and the working conditions of farm labor, for example. And really, so there's a convergence here between consumers wanting to be associated with these good brands. And at the same time, there's greater attention on how products are manufactured. And usually, the further away, the products are manufactured 1000s of miles away from Gladius. Sold, there was a sense two or three decades ago that, you know, you really couldn't get our data on what is actually happening on the ground. And that has changed dramatically.

TFC: It's very interesting. I'm wondering, from a company perspective, do many companies see this purely as just defending the brand reputation? Or is there a bit more to it than that?

VS: Yeah, you're gonna make, obviously, my own experience. Here, then I started on this ESG journey in London, working for a major international bank. And this was more than 10 years ago, it the focus was very much on replication risk. The fact that a bank or a corporate entity getting linked with a country, for example, which is, which is probably in the news for all the wrong reasons, getting linked with client getting linked with the product itself. So how do you protect reputation risk, and then you need to take mitigating action. And that mitigating action very much fits into what should obviously take place under that institutions ESG framework, so it started off very much. And then there are many companies, unfortunately, who still look at ESG, as, as you know, as a way to protecting reputation risk. At the same time, you've got a, you know, we've got many, many large companies who have moved beyond the rhetoric who move beyond the need to protect branded reputation, who are actually leading the way by building these metrics, by behaving responsibly and proving that they're behaving responsibly. I'd say we've got a good mix, I would say, obviously, in the last decade, there have been very impressive strides made by big business in particular, and I like to include the US and Europe here. And mainly because of pressure from investors. Let's not forget,

TFC: I was interested you mentioned the role of investors in driving this and and it's also in your book why investors so keen to see the ESG movement?

VS: Yeah, I think the investors learned the hard way. This is very much a legacy of the global financial crisis, where you know the underlying fate and believe pre 2008 was big business can do no wrong And indeed, we were all lulled into complacency between 2002 1008 In a global economy chugging along well that everyone is benefiting from the fruits of globalisation. And investors being on the front line with the fact they've actually put money into many of these large companies, which went bust in 2008, immediately creating the social backlash, where, for example, in the UK, the Archbishop of Canterbury, started speaking about executive pay, which, you know, there were a lot of complaints about executive pay before the 2008 period, but it became a hot button social issue, that, you know, how can you have these CEOs earning 200 300 times the average pay that a worker got in the company, so there was greater focus on the social responsibility of business. And the social responsibility of business until that time, was mainly about philanthropy and charity, that, you know, you had all these companies. And, you know, we can get into everyone. I'm a strong critic of companies just simply wanting to plant trees, for example, but then doing considerable damage in the main operation. I think all of these converged due to the global financial crisis, where there was greater focus on social purpose of business. And I think investors being on the frontline, I've got to remember many of these investors a large pension funds, be it in Europe, or the US who have publicly run publicly owned, in many cases, who actually felt that they can't, it cannot be business as usual. So they started demanding change, first in the rhetoric, of company management and board on defining social purpose, you know, so that exercise I was involved in seeing the 2013 2015 period. And then immediately, there was a cascading impact in commitments and rhetoric is not enough, we now move into hot data and facts. And I think investors want to feel assured that the and they've been many failures, notwithstanding having iDSP standards, we have to remember that there are major ESG failures happening at the same time, which materially points to the complexity of running these larger organisations, and the fact that ESG is still widely misunderstood. integrating this into strategy and operations, is still a work in progress. But you know, I'm happy that, at least in terms of providing checks and balances, we have a large investor community, we can be really focusing attention on the issue

TFC: That is interesting you mentioned the change in 2008. And your own personal experience, I wonder if you'd mind giving us a bit more of an insight into how you personally became involved with ESG?

VS: rare like game, and yet she by accident, thinking back, it probably was happenstance. At the same time. As a journalist, I started my career as a journalist. In India, I worked in Singapore and Indonesia. So I've always been interested in social impact of business. My day job was covering business and finance and economics. And I was greatly interested in how companies articulate revenge here, we're talking about the 1990s and the early 2000s. On how companies were defending themselves, and particularly in Indonesia, I saw the impact that large mining companies can have on local communities. And rather, the steps taken by these large corporation to mitigate and actually build positive social impact was a big question mark in my mind, but then I stepped away from genderism work for the International Monetary Fund for many years. Obviously, front and center of that was sound macroeconomic policy, followed by countries does that drive better economic and social outcomes? So that's very much a 360 degree perspective, on the role of bigness, on the role, obviously, of governments in driving positive, political, social, and economic change. Then I just went down to London worked for a big international bank, where I was running public policy. Yes, she came to me help almost by accident. And it was that perfect time, in my view, where there was greater public awareness building up that it's simply not enough for the CEO of a company to report 25% Jump in profits, quarter over quarter, without worrying or without paying attention to what impact or Is the company having over years at these multinational corporations are vast geographic footprints? The operator we believe from, you know, Malawi, Mozambique, into Canada and Mexico. So how do you begin to articulate that what you're doing is overall, a good thing for society. And, you know, so that was the beginning of this investor driven, and public driven movement to demand companies defined social purpose, to define the sustainability philosophy, and then actually go down to the weeds and bring the data, metrics and KPIs to prove that what they're doing can actually be seen tangibly. So I came into this set by accident. And then it's been a fascinating decade, obviously, yesterday built up as a major force through the pandemic, then huge amount of backlash now, which we should discuss. But at the same time, I think the train kind of left the station, those who wish that company should not focus on ESG issues are a bit too late to this, because I think there's a clear consensus buycks big business, particularly younger staff working in these large companies, and the society at large. But you know, you should be centered on on how your business.

TFC: You mentioned in your book kind of moving beyond, I think it was the Milton Friedman idea that companies, you know, simply do business. But it's more than that. And it's not just enough that we work in a company then do our good deeds and our private lives, it has to be connected. 

VS: Yes, I mean, I first want to offer my due respects and apologies to Milton Friedman. Why, why maybe harshly indict. In the book, The Friedman doctrine came at, took some time in context, of course, in the early 1970s, where there was active debate on what is the role of business, what is the role of government. And Milton Friedman, Nobel laureate, incredible reputation, essentially wrote this doctrine, which narrowed the scope and purpose of business to god of deriving maximum shareholder return. And he essentially said, CEOs have no business, really moving away from the primary focus of generating profits, for their bosses, between shareholders. And the treatment doctrine has had this very powerful impact initially in the US, and then, of course, spreading like a virus all over the world. And for until the global financial crisis, the doctrine, the mantra, or big business words, you know, we are here to sell sell by shareholders. We will of course, focus in this. I mean, I'm not suggesting that all businesses, therefore, and I mentioned this in the book, and Friedman's intention was certainly not that big businesses focus on profits should come at the expense of you know, for example, completely destroying the environment, not paying attention to governance, he did not say it. But in placing the shareholder, front and center of business, it had the unintended consequence of flexible CEOs expecting to be paid incredibly high amounts, compared with the person on the shop floor. So there was this 4047 48 year period, where big business became incredibly powerful, the CEO class, were rewarded with handsome returns. And at the same time, the backlash against globalisation. The backlash against multinational corporations, offshoring, the business away from developed countries began to gain momentum. Right. So there's something there about the Friedman doctrine that we should really be worried about. And you know, and the fact that the SEC is kind of caught on at the moment, signals that we've got to look at the Friedman doctrine in the past, not the practic.

TFC: And you mentioned you to the ESD trainers left and as since the pandemic, there's been a lot of discussion around that.

VS: Yes, you're not so what like so ESG and crypto are probably like, where you had this huge jump in enthusiasm, the sense that, for example, crypto was essentially going to replace money as an ignored, then everyone was going to be on the blockchain. So there was this mania on crypto Rumania separately on ESG. I think the differentiator in the ESG is ESG is bought, as I said, a set of guidelines and metrics, which help us understand how companies are behaving, then he or she also became an asset class for investors where, you know, so you've got trillions of dollars now in going into ESG, denominated mutual funds, exchange traded funds, and the like. And with the belief that, and maybe this is counterintuitive, but the belief that companies would better ESG standards will generate more positive financial returns, and more positive returns for society. And this is not necessarily true across the board. And one one should actually do a little bit more econometric research on whether companies which follow or disclose better ESG metrics, indeed, are generating better value for shareholders. But the focus on my point, making the book The focus on ESG, enterprise should not be I mean, it's great that you have this new investor class asset class in ESG products. But that should not be the driving factor, you should come back to the basics, where ESG is all about validating how a company's performing across environmental social governance metrics. And if for argument's sake, companies with better ESG standards also happen to generate better financial returns, then then, you know, there's obviously an investment appetite out there, which will be fulfilled when we've kind of gotten lost in this thicket of misinformation and confusion, that ESG is all about generating better financial returns.

TFC: Yeah. And I'm wondering if that's something to do with a timelines, you know, social changes, slow environmental change, we're talking the next 50 years, when I've been responsible for targets, you know, there's, there's this week, there's this month, maybe this quarter, you tend not to have very long term timelines.

VS: Absolutely. I mean, the climate emergency is upon. And I'm amused, backlash against ESG, with many, many folks out there saying, we simply should do away with this enterprise, right. So let's abolish ESG. Net business, go back to basics, which may be very, very tempting for many corporate CEOs at this point in time, but the climate emergency is still going to continue, the world is still going to bomb. And this unprecedented natural disasters, which we are beginning to see all over the world, and not just the developing world in the US and Europe to should give us a sense that one simple metric for companies achieving net zero target in the dimensions is a mission is incredibly important. And we should not forget that.

TFC: And of course, it goes across a range of industries a lot easier for some industries go carbon neutral and others.

VS: Absolutely. Right. So let's take a look at the big polluters, right. So the oil and gas, steel, a cement and the oil and gas industry have had their I've taken the classic ostrich paused for many, many decades. And you know, let's be let's grudgingly acknowledge that many of them have now see the light of day, and many of them have announced the cabinet pension plans. But in my view, you can't simply blame the oil and gas companies and consumers our own governments have a role. How are we going to be in ourselves of addiction to oil and gas as a consumer, right? So we should be thinking about our personal choices in what are we doing to contribute to positive change, rather than campaign against only oil and gas companies have kind of become the 1960 classic Bond villains of our time, right of this of this time, you've all seen this cigar jumping out of touch CEOs, but at the same time we are as consumers, adding immensely to the problem by continuing to drive these petrol cars.

TFC: They exist because of our demand. Absolutely. 

VS: So consumer habits also have to change. Then there are sectors like steel and cement, where you know, carbon emissions are harder to abate. I think there's some positive news and steel on the production of you know, reducing the energy intensity in producing a ton of steel, which which hopefully will gain momentum. And that's, that's, that's an overall good. But I do worry about cement, which is a critical building block in many developing countries, right? If you want a small developing country emerging out of poverty, to develop, what did they use to build the infrastructure they need to cement. So it's very easy for us living in rich countries to take this purist approach. But you know, some introduction should see completely. So then if you begin to acknowledge that you need to build multiple pathways, where large developed nations have been able to grow rapidly on this carbon industrial complex for many, many decades, they kind of take the lead on this green pathway, and give the space the climate space for other developing countries to embark on a similar journey, perhaps with an extended timeline.

TFC: That's really interesting. Yeah, traveling through mainland China, you do see whole cities arising out of genuinely out of the rice paddies entirely made of concrete criminals. Question Why is concrete so damaging in for the environment,

VS: I think it's the production rather than the use of cement and emissions from a typical cement manufacturing, clinker. And because it's fine particles, and because mainly, you're quoting limestone, and converting limestone into cement. And it's the emission of those fine particles, which lead to significantly higher emissions compared with other manufacturing processes. Now, there is stock of building in a waiting, what people have describing as green cement. I haven't seen any strong evidence on whether that can be scaled massively, so that we begin to replace conventional cement and green cement. But in order if you accept the proposition that in order to grow, a developing country has to build housing, as to build out infrastructure, then you need to focus on and you know, one metric, which is very important for us to remember your Africa in totality only contributes to 4% of global emissions. Right. So 4% is a rounding error in the billions and billions of carbon in tons that other countries emit. So I think there is a possibility of aligning the small developing countries, give them a little bit more time to obviously build the foundations of economic growth, and then begin to pivot away from carbon.

TFC: Thank you very much. And you mentioned the green cement. There has been a criticism of some companies supposedly greenwashing. If I can ask two questions at once, what is green washing? And how do we know it when we see it? So greenwashing is not a manufacturing process?

VS: It is it is manufactured internally by companies in order to label certain things that they do. Right. So greenwashing can manifest itself in many ways. Take for example, a company raising money through a green bond. And then, you know, hundreds of billions of dollars worth of green bonds are raised every year. The frustration has been that in certain jurisdictions, the rules are still not very clear that if you're raising money, say, crazy $100 million on a green bond, presumably, you're going to use that 100 million dollars for green purposes. Right? So you cannot have a situation where an oil and gas company is raising green bonds, because that's the most dramatic example of greenwashing where you're using an asset class primarily meant to help with the carbon transition is actually going into a sector, which is accelerating global warming, right. So they're going to definitional issues, their actual build of actual malpractice, which a lot of people are now focusing attention on. And then you've got claims and promises made by a company. Coming back to my earlier point on why ESG metrics is really important. claims made by companies that the embarking on a decarbonisation journey, were the facts are massaged and presented in a way which puts the company in a positive light. Right so greenwashing has many, many characteristics and And, again, it's front and center, I think for regulators to define better standards, when companies issue green products, when companies articulate decarbonisation plans, so regulation has an important role to play. Investors and consumers at the same time also have an important role to play. But I would place a greater burden here on regulators to come up with better standards.

TFC: Oh, that's really interesting. Okay. Can I ask why?

VS: When you've seen, for example, in the climate space, I mean, one, one dramatic example of better regulation is in the climate space, if you're a large corporation, or international bank, operating you're in Europe or the US, you will get captured by what is known in the trade as the CFT. It basically stands for the task force on climate related disclosures. They will these are a set of standards developed by regulators globally. And now it's cascading down nationally, in many countries, which demand that international banks, for example, disclose more about their exposure to carbon, disclose more. And these are obviously tangible financial numbers that we're talking about. We're not talking about vague statements of intent. And this is really, really this has helped, I think, and obviously tcfd is not being implemented globally. But nevertheless, it's being implemented in the most important markets, where topping emissions historically been a problem. And so it is quite possible that rigorous regulation and supervision that maybe in five years, 10 years time, you'll begin to see that the shape of balance sheets of international banks move away from carbon intensive activities into more green activities. Right. So that's why I think regulation is absolutely central to demanding change, the sentiment is not accepted widely, for example, in the US, where regulation is seen as a burden. And this, of course, differing philosophies in the US it's Friedman doctrine is still alive. And well, in many parts of the US, for example, the notion that you can let companies self regulate, on this very important issue. I don't think there's broad public support for that sentiment anymore.

TFC: That kind of touches on the one last pillar that I haven't really asked you about ESG, environmental, social, but also governance.

VS: Governance is, you know, an absolutely qualitative. And there's a bit of quantitative as well, in how are companies actually managing and reporting on these ESG risks. And, you know, governance also obviously has other focuses really worry about whether the top team in companies are the right fit by the particular company's financial reporting, is up to scratch, and whether the company's overall management team is delivering value. But when it comes to the ESG space, right question to ask is, okay, you've got these environmental social metrics, KPIs, and ambition laid out very clearly. The question to ask is, how are you managing this positivity? And how are you managing the risks? And when these risks arise? And you know, I think one one should be reasonable and admit that in companies with the best ESG metrics, and standard, we'll still face risks from still face damaging events. And that's where governance becomes critical, where you know, how you manage and mitigate those risks, indeed, read as ESG sit in a company risk framework. Now this, this is all this may come across as inside cricket, or inside baseball, depending on where you're listening to this podcast from. But it is very important, right? I think the risk function plays a really important role in managing ESG risks. Until recently, they've been very reluctant. Because this is not a topic that they're used to dealing with, typically deal with financial and credit related and operational risks, but embedding the ESG risks as part of their risk universe. It's beginning to happen. So all of this comes down to when people say, good governance. Good governance is how you manage risks across the spectrum.

TFC: Thank you very much. I feel it's solid, solid intro to ESG and it's not going away as it is here to stay.

VS: And when it's going away from my pounds into the hands of readers having written Look. And obviously leaders I opened, read the book, develop strong views, positive or negative. But I think the important thing is to participate in that public debate on how relevant this is for the difficult times that we live in,

TFC:  That makes me wonder if, for those who read your book, what is one thing you'd like them to do afterwards.

VS: The one thing that I'd like them to do afterwards, after reading the book is if they're an investor, to pay more attention to how companies are behaving responsibly, if you're a consumer, don't just walk into a store and walk out with with jeans, or what even a bottle of whiskey, just take the time to understand where the product was produced, how it was produced. And whether there are any social risks associated with the products. Be forget, you know, buying toothpaste, buying shaving cream, indeed, buying whiskey. These are random acts that we carry out every single day. We don't pause for a moment and think about, you know, how did this product get to sell? Many consumers are paying attention to that. But I think a more socially aware and conscious consumer class will lead I think instinctively to better ESG performance and governance. Without right for the Libertarians on this call. If that simple act happens, there won't be a need for heavy handed regulation.

TFC: I can tell you, I have been reading your book. My last purchase was a tie. I can't name the brand on this podcast. But I will say it is a company very well known for its very good ESG

VS: That's wonderful. Good to hear.

TFC: Thank you for listening to today's episode. For more information about a Suki Shastri and for a transcript of today's episode, please see our show notes on our website. I would like to thank Nick Wallwork and Daniel Ridge for their help with today's episode. And also Alex Jungius from This is Distorted. You've been listening to the Emerald podcast series.