Global Macro Research - The Politics of ESG | Insight Investment

Sustainability is often viewed as extraneous to a business. However, managing the impact of externalities is a precondition for any business.

• Sustainability is often viewed as extraneous to the central operations of a business, rather than a core part of its mission. However, managing the impact of externalities is a precondition for any business seeking to grow its long-term value.
• The increased focus on sustainability considerations has required companies to measure and report on their ESG performance alongside traditional financial metrics. However, this focus has led to the development of metrics that are often complex and targets which may be unachievable. Better ways of assessing ESG performance are required.
• Up until now, companies and participants have focussed heavily on disclosures, which are often time consuming and offer diminishing returns beyond certain level. Instead, senior managers should focus on simple messaging which conveys their ESG strategy and recognise business areas ripe for disruption to capitalise upon.
• Without a means of valuing externalities, such as a universal carbon price or pollution price, it is difficult to take economic and capital allocation decisions while effectively considering all aspects of financial and sustainable performance.
• Managers should also reject binary thinking when deploying capital to finance sustainable innovations. We should recognise that we require multiple applications, given those that work under one set of circumstances may not work in another.
• Adopting such an approach will become necessary as the world retreats to friendshoring and competing trading blocs, and rising political interests attempt to inhibit different innovations across markets.