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Finance & Investment
ESG 2.0:
From Corporate Proclamations and Doing Less Harm to Putting Our Money Where Our Mouths Are

“ESG in its fullest form hasn’t really been done yet. Its full potential is at the intersection of ESG and impact investing, where we can move from passive divesting and screening out of negative investments to proactive investments that generate long-term, sustainable profits.” — Alix Lebec

The rise of environmental, social and governance (ESG) investing in recent years has been nothing short of remarkable. According to Bloomberg Intelligence, ESG assets are on track to exceed $50 trillion by 2025, representing more than a third of the projected $140.5 trillion in total global assets under management.

This investment trend is reflected by the growing concern for social and environmental issues, which are becoming central to decision-making in business. Both companies and investors are realizing that profitability and longevity need to go beyond simply shareholder interest to create wider value for society.

That said, the social side of ESG — specifically, diversity, equity and inclusion (DEI) — remains something of a navigational challenge for investors when it comes to assessing its impact on corporate performance. Alix Lebec, CEO of Lebec Consulting — a women-owned and -led firm — believes corporate ESG investment has done little so far to improve diversity or eliminate discrimination, despite its successes.

“While we are seeing positive momentum within the ESG investment community, we are still far from where we need to be,” Lebec tells Sustainable Brands™ in a recent interview. She points to a Deloitte study that found that in 2019, only six of the 107 largest financial institutions in the US were run by women. “While we are seeing more women take on global sustainability leadership roles within companies, 98 percent of financial assets are controlled and still directed by white men. This lack of diversity at the top inherently influences diversity at all levels and the priority to invest in it,” she says.

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Lebec believes there is a strong case for aggressively improving leadership diversity when it comes to financial decision-making, as this will influence which investments get prioritized. “The venture capital industry only steers 2 percent of capital towards female founders — and the data is worse for women of color founders — despite the data that speak to the outstanding financial and business performance of companies led by women.”

Disclosure and analysis of social impact data needs to be improved across the board in order to gain a deeper understanding of the impact companies have on their communities, as well as their treatment of employees and workers within supply chains. Providing clear guidelines and requirements on social data reporting would certainly help in this respect, Lebec says.

“We need global standards on how to measure and report on ESG; and this needs to work not just in the US and Europe, but in developing and emerging markets as well. This will help mitigate risk and inform proactive investment decisions that create a more equal and sustainable world.”

Developments that may prove helpful in this respect for investors include the International Sustainability Standards Board (ISSB), which aims to provide a global baseline of disclosure standards on ESG to measure and report against. More specifically, there is Nasdaq’s Board Diversity Rule that requires companies listed on the US exchange to publicly disclose board-level diversity statistics and have, or explain why they do not have, at least two non-white-male directors.

Lebec thinks both initiatives show promise; but she emphasizes there is still a long way to go. “ESG ratings as they are today are suboptimal and focus more on the impact the world has on companies rather than how companies affect the world — this is ineffective,” she says.

“ESG in its fullest form hasn’t really been done yet. Its full potential is at the intersection of ESG and impact investing, where we can move from passive divesting and screening out of negative investments to proactive investments that generate long-term, sustainable profits.”

Asked what steps investors can take to ensure that DEI issues aren’t being overlooked when managing their ESG portfolios, Lebec advises applying various levels of scrutiny.

“Do a deep dive on who is leading the companies you’re investing in. How diverse are the board and leadership teams? Ask for salary data — do they pay their employees well; and is there equity across diverse employees doing the same job?”

She adds that investors should also look to obtain employee feedback on company culture and corporate behavior relating to DEI — and do some supply chain digging.

“How are employees globally and across the supply chain treated? Are there incidents and reports of child labor, or abuse of women in the supply chain? I would also ask for data on the social impact of your ESG investments — because all components of ESG are interconnected.”

The Sustainable Development Goals (SDGs) could prove helpful in this respect — as they are not only internationally recognized but considered a viable framework and barometer for setting and meeting ESG targets. Lebec also emphasizes the importance of increasing investments in diversity globally, not just within the US and Europe.

“Diverse perspectives lead to better outcomes,” she concludes. “When the world’s financial and business decisions are majority-led and executed by white men, it stifles perspective, innovation, new ideas and finding solutions at the intersection of people, planet and long-term profitability.”