‘Competence greenwashing’ could be a big risk for the ESG industry

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– There is a wide disparity in ESG expertise among those doing ESG work. Many getting into the ESG field are moved over from a number of other departments.
– Properly evaluate quality of ESG training programs. Collaborate with professional organizations to get the scientific expertise you need.

Kim Schumacher has written a number of pieces on this topic – and this article he penned for the “Responsible Investor” might be his best. Here is an excerpt:

Looking at the profiles of many senior ESG staff that were appointed over the last few years, one can observe a trend insofar that most ESG posts have often been filled with people with non-traditional ESG backgrounds. This is, on the one hand, laudable as it enables cross-entrants into the areas of ESG and sustainable finance. On the other hand, it raises the question about what skills are actually needed in order to manage further sectoral ESG integration.

A look at profiles of ESG professionals reveals few people with natural science backgrounds, with people mostly trained in traditional financial sector disciplines such as management, business, accounting, finance, economics, or politics and law. And while these skills, in combination with traditional professional certifications, especially the ones conferred by the Chartered Finance Analyst Institute, constitute essential skills if operating with purely financial metrics and indicators, they represent only one side of the ESG coin.

Non-financial and extra-financial data are inherently different from the data that financial sector experts have dealt with before. Practitioners need to understand the complex and granular aspects of science-based measurement and verification processes beyond scope 1 and 2 emissions.

However, the breadth of ESG data points is seldom fully understood, as ESG in itself is already a composite of environmental, social and governance issues that are sub-divided in multiple categories. E, for example, contains highly technical fields including climate change, biodiversity, natural capital, ecosystems, and pollution, to name a few. Scientists are often specialised in one particular area as it is virtually impossible to cover every aspect of a discipline.

And this excerpt offers up his five solutions:

1. First, do an internal assessment of your human resources capacities and define to what extent ESG capacities are covered throughout the organisation. It entails going beyond existing CSR or sustainability capacities and identifying how dependent the organisation is on external ESG services. The complex nature of ESG and the persistent unreliability of corporate data require experts who have knowledge about financial materiality just as much as about non-financial ESG-related aspects.

Given these data risks, consider to what extent these can be identified and dealt with internally, should there be inconsistencies with the data. Large asset owners such as the GPIF have described the significant variances between corporate ESG ratings from service providers. Therefore asset managers, as well as asset owners, require competent staff that are able to evaluate financial products and corporates independently based on raw data. Using a terminal or consulting ESG scores and ratings is not enough, in both active and passive management strategies.

Furthermore, ESG covers a vast area of different disciplines and topics, for which sectoral experts are indispensable. An expert in biodiversity is not necessarily an expert in energy-related carbon emission reduction technologies. A development expert might have some knowledge about water issues, but that does not amount to profound expertise in hydrology. Natural scientists are not experts in human rights law.

2. Second, expand ESG training of current staff by evaluating the quality of ESG training programmes on the market, because not all programs are created equal. The content and institutional relevance of programmes vary largely, with some focusing primarily on corporate governance or disclosure, with others looking more at the financial aspects of ESG integration.

The main element of any solid introductory ESG or sustainable finance certificate programme should be the science behind ESG integration, as it represents the key rationale for considering ESG factors in financial decision-making and risk management.

3. Third, certificates or short leadership programmes are not an adequate substitute for expert-level technical knowledge level that years of scientific research about ESG issues can provide. The next steps for organisations and institutions are to create diverse teams that cover that complexity of ESG factors.

As non-financial data becomes more science-driven, and the topic broadens from purely financial considerations, investors and companies that are serious about ESG need to hire more people with scientific backgrounds, be it from the E, S, or G areas. The presence of these people with within the ESG, sustainable, or climate change divisions will lead to ‘cross-pollination’ effects, wherein practitioners with financial, business, and management backgrounds will learn from their scientist counterparts, and vice-versa.

4. Fourth, not all organisations have the material or financial resources to build up or maintain large ESG or sustainable finance divisions. Collaborations with academic and professional research organisations offer a way of supplementing internal capacities with existing scientific know-how. Scientific reports like the IPCC assessment reports on climate change, which form the basis of climate action, cite scientific publications produced by academic and other public or private research organisations.

These organisations produce most of the world’s raw peer-reviewed and non-self-assessed ESG-related data. Therefore, establishing collaborations and partnerships between the financial sector and the research community can be mutually beneficial. They can provide technical and scientific expertise to the financial sector while providing additional funding and internship pipelines to research organisations.

5. Fifth, in line with the plans for uniform sustainable finance taxonomies and standards, ultimately there could be some form of objective standards for ESG practitioners, similar to the bar exam for legal practitioners. This would guarantee a minimum of foundational knowledge for people in the ESG and sustainable finance sectors.

The learning requirements and assessment criteria need to be transparent and could comprise a general portion, and a speciality portions respectively for E, S, and G, depending on individual skills and preferences. Organisations such as the International Standards Organisation could initiate a globally standardised test based on science and international policy principles. This does not preclude national test variations, which could take account of specific jurisdictional circumstances.

This article is not meant to be a criticism of people with financial or non-scientific backgrounds takings certificate courses in sustainable finance or pursuing careers in ESG. It is rather a call for more natural scientists being systematically integrated into financial institutions, as it would benefit the entire sector. For climate change, we listen to scientists; for ESG, we should do the same.

Also see this note from Roger Charles:

Faced with a lack of organic ESG talent, finance professionals are also placing a huge reliance on external ESG data service providers. But the data from these sources are very much gathered from self-published corporate reports and portfolio analyses that tend to have a relative amount of biasness and subjectivism. Deep expertise is required to dissect and analyse potential variances, complexities and inconsistencies in external ESG data sources. Very few financial institutions possess a team with dedicated technical knowledge on ESG issues.