ESG Takes on a Bigger RoleBy Cas Biekmann | Mon, 12/28/2020 - 12:55
Environmental, Social and Corporate Governance (ESG) criteria are defined as the three main factors with which the sustainability of a business and its social impact can be measured. Even though modern businesses often operate with the goal to generate value for shareholders, Bloomberg News analyzes that this trend is changing. Driven by popular demand, companies are realizing sustainability might matter as much as profits. Clean energy producers stand to benefit globally.
Examining the history of ESG in the US, Bloomberg News cites a 1919 court decision involving Henry Ford and two Ford shareholders: the Dodge brothers. Ford aimed to share the benefits of industrialization with his workers by hiring more and paying better. The Dodge brothers wanted to see dividends raises instead and went to court. As a result, the Supreme Court of Michigan ordered Ford indeed to pay more dividends but simultaneously introduced the ‘business judgement rule’, giving company boards wider power to decide what is best for the business.
The grey space introduced here has never actually been fully defined. As a result, those who prioritize shareholder primacy have long argued against those who would rather see different priorities, such as ESG. Bloomberg News highlights that in the US, federal agencies under the last days of the Trump administration are attempting to narrow the scope for ESG criteria, even though the Biden administration would likely boost its role in business development.
Globally, ESG is becoming more important, even in Mexico. “In Mexico, we are observing the increasing trend of corporate sustainability compliance, sometimes due to supply chain commitments, where their largest clients are performing audits on ESG performance. According to the International Renewable Energy Agency (IRENA), in 2018, over 100 companies had reached an 85-100 percent renewable energy mix worldwide. In one of IRENA’s recent studies, the agency interviewed over 2,000 companies, 86 of which were located in Latin America and the Caribbean. Of those, 36 percent had sustainability goals,” wrote María José Treviño Melguizo, Country Manager of Acclaim Energy Services, on MBN. As a result, companies in the renewable sector stand to profit from these goals, offering supply for this specific demand.
But energy companies themselves must keep ESG criteria in mind as well, said Lucía Barrera, Social Responsibility Consultant and Project Manager ESG Projects at Enûma, in an MBN interview. “Nowadays pension funds are willing to invest in energy projects and are requiring to include ESG parameters to maximize the positive impact of the project. It is important to remark that rather than merely focusing on ROI, they want to see significant social and environmental impacts, as well. Most institutional investors are starting to align to the Principles for Responsible Investment (PRI). In short, projects are still being developed but it is crucial for them to do well financially but also socially and environmentally.”