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The Vanishing of 'ESG'

Until the 18th century, acting was essentially reserved for male artists. Public performances were deemed to be unsuitable to female actors. Over time, place was duly made for women. To support that objective, the word ‘actress’ was introduced.

Since then, many female actors have achieved stardom. As a result, the appellation ‘actress’ has been abandoned: ‘Actor’ is accepted as the only appropriate designation since deemed to be gender neutral. Having completed its mission, ‘actress’ can disappear. The same goes for ‘Policewoman’ (now ‘police officer’)’ or ‘Chairwoman’ (now ‘Chair’ or ‘Chairperson’.)

Now consider the ESG trends. Investors have been piling on the few companies which have positioned themselves at the forefront of ESG at an early stage. Within each sector, best-in-class ESG companies have been demonstrably attracting investments from ESG-focused investors.

But this is a competitive world. Keen to attract a new pool of investors, more and more companies are implementing the right measures from an ESG perspective. Whereas they cannot change what they do in the short term, they can improve how they do it, in particular when considering environmental and social matters. This would include well-known factors such as their carbon and water footprint, policies related to pollution and waste, employee diversity and responsible sourcing. Bill Gates offered a few reflections for corporates in My Green Manifestopublished two days ago.

There is thus a powerful trend towards standardization when it comes to ESG-related policies, targets, and reporting. Investors’ ability to distinguish from one company to another is set to fade over time – perhaps rapidly so, judging by the current momentum. Who does not have diversity targets? Who is not wholeheartedly embracing the energy transition? Who does not have a zero-emission target by the middle of this century? Competitive pressure associated with stakeholder activism will continue to reduce disparities and, with them, the potential for differentiation. Such is the beauty of the capitalistic model.

Once best ESG practices are adopted by most corporates, ESG will center on what a company does. To assess the impact of a company’s sustainability profile on value, investors will rely on hard core financial analysis. As it relates to climate change, they will be compelled to make assumptions about any given asset’s perpetuity growth rate and potential future liabilities associated with physical and transition risks under various scenarios.

Faced with the financial uncertainty attached to activities subject to unfavorable ESG drivers, industrial groups will adjust their strategies and prune their portfolio to maintain their financial market appeal. Who will take ownership of these orphan assets? An M&A market for them has yet to be created.

Much like what has happened to the word ‘actress’, ESG’s true achievement will be measured by the speed with which it becomes second nature to all economic actors and disappears through total absorption into corporate policies, strategies, and financial analysis.

It took more than three centuries for ‘actress’ to do its job and vanish. There is a much shorter timespan available to ‘ESG’ to do the same.

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