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COP27: What is ESG investing and can it help world leaders limit global warming?

Guests enter the convention centre hosting the Cop27 U.N. Climate Summit, Friday (Peter Dejong/AP) (AP)
Guests enter the convention centre hosting the Cop27 U.N. Climate Summit, Friday (Peter Dejong/AP) (AP)

Rishi Sunak’s arrival in Egypt for COP27 puts the new prime minister alongside a host of world leaders and senior corporate executives seeking ways to limit global warming.

Global investors and multinational companies have long been highlighting their Environmental and Social Governance credentials, to benefit from demand for responsible investment along green and responible lines, as highlighted by the ESG trend.

From London to New York via Shanghai and Sydney, many of the biggest names in the financial and corporate world have rushed headlong to embrace ESG. But as overall carbon emissions stay high, there are fears from pressure groups, and within major trading centres alike, that much of it amounts to hot air. A derogatory term – greenwashing – is already coined at its expense and is in wide circulation.

ESG investing is supposed to offer a way of identifying companies that help fight climate change, via plans to cut their own greenhouse gas emissions or development of alternatives, such as carbon-offsetting. Such strategies are much-discussed at the UN-brokered COPs, or Conference of Parties. They aim to ensure global warming can be limited via reduced emissions in line with  the targets agreed at the previous COPs in Glasgow and Paris.

Household names like Nike and Vodafone have become partners to a range the initiatives set up at the talks. They also include some of the world’s biggest fossil fuel companies, including London-listed Royal Dutch Shell, which has been named as a “carbon pricing champion” for supporting UN efforts designed to set an emission price for the greenhouse gas of “$100 per metric ton over time,” even as it extracts millions of barrels of oil per day alongside developing greener alternatives.

Such generalities and contradictions are seen as better than nothing by their supporters. But others argue they just a smokescreen hiding a lack of more meaningful change. Critics point to a lack of properly independently verified criteria around ESG investing. The main City watchdog in the UK has recently announced a crack down on use of the ESG labels on funds. New rules from the FCA next year will bite into how words like “green”, “sustainable” and “responsible” are used, unless they meet regulator’s criteria.

International efforts are underway for rules on what should and should not count, from the likes of the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures.

Moves for clarity have done little to cut the criticism, amid stellar growth of ESG indexes and exchange-traded funds to offer ways into the concept. Nonetheless, Environmental and Social Governance criteria have moved into the financial mainstream.

Dominic Rowles, Lead ESG Analyst, Hargreaves Lansdown said: “Whatever is agreed at COP27, the climate remains a vital consideration for investors. It’s more important than ever to make sure … managers consider the impact climate change will have on the funds’ investments.

“On top of increased regulation, those companies not seen to be doing enough could face a customer backlash, negative press, and reputational damage.”

But as long as there is no consensus on how to measure ESG properly, critics are likely to remain vocal.

Zeina khalil Hajj, head of global campaigning and organising at environmental pressure group, said: “Shifting the multi-billion dollar investments from fossil fuel into renewables is the critical missing step towards actually meeting the global commitments made in Paris.

“The reality is that the financial sector and the fossil fuel industry continue to collude, funding further destruction and exploitation by financing fossil fuel projects … We need to stop throwing billions at the system that has brought us to this climate chaos.”

COP27, at the Sharm El Sheikh resort on the Red Sea, started on Sunday and runs to November 18.