Vicki Kalb: The focus shifts from risk to the upside possibilities of ESG

In a work context I look at sustainability as meaning whether a company will be a going concern in five-, 10- or 50-years’ time and I ask what sustainability risks and opportunities are relevant today or potentially in the future? Sustainability issues are fundamentally changing business models, operating environments, and the competitive landscape.

I think the key difference is that the market and investor base has changed, and timelines have accelerated. ESG considerations are now affecting companies in real time, and certainly within an investable time horizon, which was not the case in the past. Climate change, for example, was often seen as something that would affect companies at some indeterminate point in the future.

An ESG investor used to be more specialized, with a wide range of sustainability investment approaches. That changed in 2018, when ESG started to go mainstream, to the extent that it’s now difficult to find an investor who doesn’t take sustainability into consideration in some way in their investment process. Now, the most common ESG investing approach we come across in our client base is ESG integration or ESG being considered in the investment research process. Something else that I think has changed significantly is that there used to be a widely held view that ESG was largely or entirely focused on downside risk.

We’re now seeing a lot of activity and focus on ESG-related opportunities, everything from technological innovations to regulatory stimuli.

We have done a lot of work on supply chains—improvements in supply chain practices offer significant opportunities but equally downside risks are high. The range of inputs we need to consider is vast, ranging from regulatory shifts, to new technologies like AI plus geospatial data that can shed light on very opaque supply chains, to the physical effects of climate change putting supply chains at risk, to trying to figure out whether consumers will change purchasing behavior based on supply chain practices. The list is endless.

Another area we’ve been focused on is water risk. It’s hard to think of an industry that does not depend on water in some way. Unfortunately, we’re seeing water-related problems happening more and more frequently both from an industry or company perspective, but also from a civil society perspective. For example, data centers, power plants, and semiconductor fabs all need a lot of water for cooling. We’re seeing an increasing number of cases where there just isn’t enough water, and this is becoming a critical operational issue. 

Unintended consequences. We always look at purported sustainability solutions and try to assess whether there is a risk of creating an even bigger problem down the road.

It’s incredibly important to use a systems thinking approach when looking at ESG; ESG issues are complicated and interconnected, and trying to oversimplify them can hide risk factors.

One example is the growing shift of plastic to fibre usage. Consumers have long been told that plastic packaging is “bad.” While that’s certainly true from a pollution perspective, as plastic doesn’t degrade but continues to accumulate, the problem is that some popular substitutes can end up causing even worse environmental problems. Switching from plastic to wood or paper-based packaging is not necessarily the answer. That packaging will degrade in the open environment where plastic won’t, so that’s a positive. But science also tells us that we should not cut down trees in the battle against climate change, and that managed monoculture timber plantations can be very poor from a biodiversity or even carbon sequestration perspective. So better solutions need to involve reduced use, not substitution for another material. 

I find the entire subject area fascinating, as well as challenging. We need to cover a wide variety of topics for our diverse client base—anything from forever chemicals to supply constraints in critical raw materials that are necessary for the energy transition, to the severe environmental and social challenges in Fast Fashion, to how AI is being used in deforestation analysis. In addition to supporting our clients’ decision making, we always learn something for ourselves. 

That humans can and do adapt, quickly, when necessary.