Tuesday 28 June 2022
Along with the increase of Assets Under Management (AUM) committed to ESG funds and ESG investments, a most conspicuous and unexpected caravan of ESG experts have arrived to help guide the way.
How, one might ask, did all these people earn their expertise? How did a wave of young professionals amass experience and exposure in an industry that was largely unspoken of until the last 5-7 years? How did people with finance or marketing jobs learn, in the context of their work, how to conduct ESG diligence, how to proffer annual sustainability or impact reports, and how to raise sustainable finance? The quick answer is that most of them did not. ESG has really only dripped into the investment lexicon over the last 5-7 years in most parts of North America and Europe. Prior to that, the only capital allocators actively speaking about and enforcing ESG performance were the Development Financing Institutions of capital market governments investing in emerging or frontier market businesses.
Today, professionals who have earned their experience in corporate social responsibility (CSR), social impact, human resources, conservation, marketing, and finance are rebranding themselves as ESG experts. It is mystifying. And it’s market driven. They are responding, in a rather opportunistic way, to the rising demand for ESG talent. They are not unwise; but they may be under resourced. Their experience, while hard earned and valid, may not have prepared them for the demands of managing, measuring, and communicating ESG performance to audiences of customers, staff, C-suite leaders, boards of directors, and investors.
Talent available in the market is a lagging response to market demand. If enough companies advertise for ESG positions, the market of talent will get the message and adjust the rendering of their professional profiles accordingly.
Some have called this “..the emergence of the rebranded ESG market participant storming into a market which development finance institutions spent decades stabilising.”
Ten years ago, the only entities requiring ESG management and disclosure were development financing institutions (DFIs), mainly in Europe and mainly to manage their investments in emerging and frontier markets. The requirements of the DFIs caused private equity firms and other general partners to push ESG down onto their portfolio companies. Today, capital allocators are increasingly requiring ESG management and disclosure of their capital market portfolio companies as well. At the same time, companies in capital markets are feeling the ‘pull’ toward responsible management of ESG issues from their customers. This dual mandate involving the push from investors and the pull from customers has caused private and public companies and investors in North America and Europe to respond. Their response requires leadership and execution and the need for a new set of skills and professional acumen.
Even amongst those who brand themselves ESG experts, there is a spectrum of ability, with strategic business integration of ESG at one end and data consolidation and execution at the other. Strong management of ESG performance at the company or fund level requires both.
"We've traveled a journey from mid-ranking individuals who can coordinate data to someone who can lead a whole team and who needs to be sophisticated enough to be able to deal with multiple different types of stakeholders and really understand the world of business, the world of strategy, the world of finance and the world of regulation," Richard Mattison, chief product officer for ESG at S&P Global, explained. "And those people are rare."
The best ESG leaders are those who began their ESG careers in the trenches: engaging communities of stakeholders, executing ESG data management, creating policy, crafting ESG management systems, establishing materiality, measuring water use and emissions, and authoring disclosures on ESG performance for company leaders, boards of directors, and investors. To become a strong ESG leader, one benefits from having begun as an ESG implementer.
"What's happening is that it's gradually progressed from that position to someone who's actually starting to lead efforts within a company to coalesce and coordinate; to someone who's moving the company from spreadsheets to systems; to someone who's now leading the company from the perspective of, for example, understanding what your investors want and how you need to position your reporting and your strategy; to someone who is driving capital allocation within a company, who also knows about ESG and investors, and who can drive sustainable outcomes and is senior enough to get the attention of the board. "
ESG leaders must perform the role of business partner. They possess the unique opportunity to lend credibility and weight to ESG initiatives by weaving said initiatives into the core business and bottom line of a company. ESG is not corporate social responsibility. It’s not the same as social impact programs or community development initiatives or even climate change mitigation, exclusively. ESG management has everything to do with building responsible conduct into the DNA of a company. It has to do with how you constitute, build, and grow a strong company. For investors, ESG is triggered at each stage of the investment lifecycle: from fundraising, to pipeline screening, to deal structuring, to holding, to exit. ESG leaders must have a nuanced, well developed understanding of the ways that capital works to build business.
Suggested Way Forward:
- Build your bench: hire two kinds of people onto your ESG team. Those with deep, direct ESG experience to drive strategy, external engagement, and communications; and those junior professionals with the hunger, passion, intelligence, and curiosity to execute and build their expertise along the way.
- Be critical and careful in your recruitment: be wary of resumes filled with senior leadership roles at large companies. Large companies with impressive names do not necessarily facilitate a greater or deeper level of ESG exposure for people. On the contrary, a large company can often mean that executives live further from direct execution of ESG initiatives, limiting their experience.
- Diverse experience is better: ESG professionals who have only worked in North America or Europe have a much less nuanced understanding of ESG than their counter parts in the global South. This has everything to do with the length of time that ESG has been pushed, enforced, tracked and monitored. It has simply been happening for longer in places like Latin America, sub-Saharan Africa and parts of Asia. A person who has implemented ESG risk management and value creation in emerging and frontier economies has had to effectively implement first world standards in third world conditions. This is hard work. Those who have done so are rare and valuable.
 Naidoo, Marc. The Rise of ESG Experts in Sustainable Finance.
 Makower, Joel. Inside the War for ESG Talent. Greenbiz.
 Makower, Joel. Inside the War for ESG Talent. Greenbiz.