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Investing in ESG, let’s cut the bullshit.

Some history

In 2015, 196 countries and the European Union signed the Paris Climate Agreement[1], with the commitment to limit global warming to 1.5° compared to the pre-industrial era. Even if the method to achieve this is unclear, the commitment was strong and finance was not forgotten. In Article 2c[2], the Paris Agreement states that “financial flows must be consistent with a greenhouse gas (GHG) reduction pathway and resilience to climate change “. This means that finance must be involved in climate change mitigation efforts and in the adaptation of infrastructure and lifestyles.

Mitigation means using less fossil fuels. Adaptation means protecting populations and ecosystems from climate change that is already here. These are the two main axes of climate action.

This agreement gave a strong impetus to the financial world. Institutional investors began to direct their flows towards climate and sustainability issues. It is no longer a question of making marginal investments or avoiding a few options. This new investment strategy developed at full speed, and became known as ESG investment, for Environment, Social and Governance, three different factors grouped under the same banner.

In just a few years, we have seen a genuine surge in ESG investments, reaching $35,000 billion in 2020, which represents more than a third of the world’s financial assets (Assets under management). In some countries, such as Canada, the share of ESG investments exceeds 60% [3]. A considerable figure, which raises questions. One wonders whether the real economy, which is the underlying basis of these financial assets, has been transformed to such an extent in such a short time.

Even Larry Fink, the high-profile boss of BlackRock, an asset management behemoth, took to the subject in 2018. In his annual letter to CEOs, he advocated the era of responsible capitalism[4]. Gone was Milton Friedmann’s liberalism and the priority given to shareholders, what mattered now was the prosperity and security of citizens. Companies should take into consideration all their stakeholders, in an approach that integrates social and environmental concerns, and that John Elkington has called “Triple Bottom Line” for People, Profit, Planet.

Lack of international standards and the label jungle

But there was a big problem. There was no standardized and universally accepted reference framework that defined what ESG really was. So everyone could set their own preferences and priorities. For some it mostly means the environment, but not necessarily the climate, perhaps only the reduction of waste and water consumption. For others it is more the social aspect, for example through security and training. Finally, in the area of governance, an area that has already been strengthened over the last ten years, we ensure, for example, the appointment of independent directors and the transparency of executive compensation.

It is clear that the ingredients of the “ESG mayonnaise” are highly variable, with fluctuating proportions of E, S and G. The flavour of the mayonnaise will vary according to the company’s priorities. Will it be tasty? As Aswath Damodaran, an eminent professor of finance at Stern who is highly critical of ESG, so rightly said, “goodness is in the eyes of the beholders. [5]

However, green, ESG, responsible and sustainable labels are flourishing, and rating agencies are embarking on extra-financial initiatives. All of these agencies eagerly evaluate objects that are not at all comparable, with data of heterogeneous quality.

To mention only CO2 emissions, companies’ information often stops at scopes 1 and 2, without taking into account scope 3[6], like some airports that claim to be carbon neutral because the airport fleet is electric, but forget to take into account air traffic. A good example of greenwashing. Sometimes companies do not even provide any information on their physical emissions (tons of CO2), merely mentioning, in a qualitative approach, the actions they have taken to decarbonize their activity, or the governance set up to steer a trajectory that aims for Net Zero[7] by 2050.

Rating agencies, on the other hand, want to cover as many companies as possible in order to sell extra-financial information to asset managers. This is their business. So instead of wasting time doing in-depth assessments and talking to management, they send companies lengthy questionnaires to fill out every year. I call this “tick the box” ESG. This proliferation of forms and indicators leads to a serious problem of lack of transparency in the financial markets, as was the case in 2008 with the subprime crisis.

Is standardization on the horizon?

This can’t last. Stakeholders are exerting pressure. NGOs, young activists like Greta Thunberg, future employees, consumers, are getting angry on social networks and in the political ecology sphere.

So governments and regulators are finally realizing that they cannot delegate the sustainable transformation of the economy and businesses to the financial markets. They have to get involved, play their role as regulators.

And so regulations are being put in place, in particular at the European level with the new taxonomy that now classifies activities according to their sustainability. According to this taxonomy, sustainability does not stop at climate, it also includes the protection of water and oceans, the transition to a circular economy, pollution prevention and the protection of biodiversity and ecosystems. That is a total of 6 environmental objectives[8].

To be aligned with the European taxonomy an activity must meet the following conditions:

  1. have a significant contribution to one of the 6 environmental objectives
  2. not cause any harm to the 5 other objectives (“Do not harm” principle)
  3. respect minimum social standards (OECD, UN and ILO principles, international charter of human rights)
  4. comply with the technical standards of the implementing decrees published via the delegated act.

For once, it is not a directive that will take years to be transcribed into local law by each country, but a regulation that has just come into force. Europe has achieved what no European national government could have managed to legislate on – because they are all prisoners of a “tragedy of horizons”[9], the contradiction between their political horizon of 3-5 years and the time of climate change, which is more than 10 years.

And so, from 2023, companies with more than 500 employees will have to declare the part of their activity that is sustainable in the sense of the European taxonomy, which is now called “green ratios”. Their performance will now be assessed according to these green ratios. It is important to note that the obligation applies not only to their turnover, but also to their investments, because it is indeed industrial investments that are the real vectors of a long-term transformation. This means, for example, that the major oil companies will have to report very precisely on the proportion of their investments in renewable energy. We will finally be able to know whether those who are making communication campaigns about their transformation are translating their fine words into action.

The European taxonomy will be completed by an overhaul of the directive on non-financial communication, which will now be called CSRD and will apply to all companies with more than 250 employees (50,000 companies in Europe). As for banks and financial institutions, they will have to publish their “green asset ratio”, i.e. the share of their loans intended to finance sustainable activities.

This is a new paradigm, almost a Copernican revolution that puts sustainability at the center, and no longer at the periphery. Unless these green ratios are just additional indicators, to be added to the traditional indicators of financial performance? Will we still be able to identify the most sustainable companies?

Whatever the case, these laws will apply throughout the European Union, as well as to the subsidiaries of European companies outside Europe: their influence will therefore be global, as was the case with the American Foreign Corrupt Practices Act (FCPA), whose extraterritorial nature has made large companies on all continents tremble.

This new legislation will also direct financing, whether public or private, in debt or capital, towards sustainable activities. The ambition is to transform the European economy in the framework of the Green Deal[10] and to achieve carbon neutrality at the European level by 2050 to limit global warming.

Greenwashing, the grip is getting tighter

Greenwashing, which has flourished in a context lacking standards and norms, is increasingly the subject of legal action and even condemnation.

Here are some notable examples in the energy sector:

  • ENI, an Italian oil company, was fined 5 million Euros in 2020 for false advertising of its Green Diesel,[11]
  • Total Energies was sued in 2022 by 3 NGOs (Greenpeace, Amis de la Terre, Notre affaire à tous) for false environmental claims, in other words, contradiction between the communication campaign and the reality of the actions.[12]

There will be a growing number of such lawsuits against behaviour that can be described as deceptive commercial practices. And they may lead to criminal sanctions.

Advice to businesses

In this context, which is becoming clearer and tougher, companies must mobilize now to :

  1. Understand the new laws and regulations that come into force, and even maintain a constant dialogue with the various regulators to anticipate their recommendations
  2. Learn how to calculate their “green ratios” and have a robust methodology to justify their ESG performance, by applying globally recognized standards.
  3. Communicate in a responsible and honest manner, taking care to stay away from greenwashing.
  4. Given the scope of the work to be carried out, it is also a question of training employees in the new skills required (technical, legal, etc.), so that they understand what is at stake and share the ambition to make the company more sustainable. This requires a very wide-ranging training plan, from the members of the Board of Directors to the operational staff in the field.

Last but not least, companies need to transform their strategies and business models to become more sustainable, otherwise they risk not being able to finance themselves and not attracting the talent they need.

Anne Frisch – 29/08/2022


[2] French text of the Paris agreement

[3] 2020 Report

[4] In English :,

In French :


[6] Scope 3: indirect emissions up and down the value chain

[7] Defined by the United Nations as the reduction of emissions “as close to zero as possible, with the remaining emissions in the atmosphere being reabsorbed, for example by oceans and forests”


[9] A phrase coined by Marc Carney, the Governor of the Bank of England, in a speech at Lloyd’s in 2015


[11] This biodiesel is made with palm oil, a crop that contributes to deforestation



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