I live in a small West Texas town with only one bar (the Christoval Icehouse) – not including the new pizza place and the nearby winery. The bar’s proprietors are friends of mine (as are the owners of the pizza place and winery – like I said, it’s a small town). After receiving my Texas alcoholic beverage server certification, I offered to help out behind the bar for free. Having never bartended before, I thought it would be fun (it was, despite my facial expression in the photo) and give my friends some time off. Last weekend was my debut and it actually went pretty well. During the evenings, I talked with patrons about my real job here at PracticalESG and what I think is likely to happen in the ESG space. Those talks got me thinking about predictions for 2023, in turn leading me to look back at 2022 prognostications by me and others.
I came to the conclusion that predicting the future of ESG is simply not a meaningful exercise for me, and I don’t expect to do it anymore. What became clear in my 2022 retrospective is that human perceptions and reactions to issues create insurmountable unpredictability. Readers of my blogs and book know well the bromance I have with Nobel laureate Richard Thaler and his theories of human irrationality and how we “misbehave” in comparison to traditional economic theories. It is obvious humans also misbehave in relation to ESG policy development, compliance and program implementation.
Just a few examples:
- A previously unimaginable and extended conflict in Ukraine crippled EU green energy policies and progress.
- Unforeseen corporate belt-tightening and layoffs from tech giants, which tend to be ESG leaders, spurred concerns about ESG jobs and corporate program funding. Global inflation hit a level not seen in 50 years, causing consumers and companies to carefully assess every expense and focus on traditional business fundamentals – putting ESG and DEI initiatives on thin ice.
- Widespread board shakeups feared after Engine No. 1’s successful battle with Exxon didn’t materialize.
- Federal and state anti-ESG campaigns surprised many by manifesting in state laws, public hearings and termination of state contracts with investment firms considered to be “boycotting energy companies”.
- Luxury items cemented their position as being recession-proof – with minimal ESG product attributes in contrast to mass consumer demands/expectations.
- The rise of COP26 hyper-optimism, the fall back to practicality (or pessimism) and COP 27’s failure to deliver on key issues as talks stalled around greenhouse gas reduction commitments and the future of fossil fuel development.
- Asset managers announced that tens of billions of dollars in investments would be reclassified from Article 9 funds to a lower level fund label as the EU taxonomy struggles to clearly define Article 9 parameters.
- Oil’s record setting economic comeback, causing some to question whether environmental goals and financial goals/duties are mutually exclusive.
- The SEC hit a technical glitch in its public comment collection process, resulting in a delay for publishing a final climate disclosure rule.
- A push for returning to the previously-unsuccessful “sustainability” terminology.
What This Means
Although I present this in a humorous tone, there is an important and practical lesson. While I might be able to avoid making predictions on PracticalESG, companies don’t have that luxury these days. ESG risk or materiality assessments are commonly conducted annually – or even less frequently. Some have suggested that current best practice is to refresh materiality assessments every two years. The rate of change, human “misbehavior” and uncertainty surrounding ESG are too great for annual (or longer) frequencies to be meaningful. Companies should give serious consideration to increasing the frequency of their ESG assessments. Additionally, it would be prudent to explicitly/clearly communicate that unpredictable global dynamics could materially impact corporate assumptions, actions and results. This may also lead to new contingency plans that allow you respond to changes more rapidly and create advantages over competitors. And if you are ever in Christoval on a weekend, stop by the Icehouse and say hi. Just don’t ask me to make any predictions.