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James Corah: Unthunking the ESG Glunk

11 May 2022 Expert insight

Dr James Corah from CCLA suggests the sector should unthunk the ESG Glunk, and get back to driving the change

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Could she Un-thunk the Glunk alone...
It’s very doubtful whether.
So I turned on MY Un-thunker.
We Un-thunk the Glunk together.
Dr Seuss

In The Glunk That Got Thunk Dr Seuss tells the cautionary tale of a small girl who, after becoming frustrated about only ‘thunking’ about ‘fuzzy little stuff’, turns up the intensity of her thinking. The result is ‘The Glunk’, an imaginary monster who becomes real and begins to wreak havoc. Try as she might, the girl cannot thunk the Glunk away. However, just as her family stands on the brink of financial ruin, her brother (The Cat in the Hat) returns and by working together they manage to save the day and un-thunk the Glunk away.

We face many challenges. On climate change, despite significant progress, current international policies are expected to only limit temperature rises to 2.7 to 3.1 degrees Celsius above pre-industrial levels. This is far above the desire to limit temperature rises to 1.5 degrees as set out in the 2015 Paris Climate Change Agreement and, if unmitigated, will continue to lead to increased poverty in many low-income countries, erratic weather patterns and accelerated biodiversity loss. 

Similarly, despite increased attention from companies and policymakers globally, 40 million people are estimated to live in a state of modern slavery (see The Liechtenstein Initiative). Income inequality across countries in the Organisation for Economic Co-operation and Development (OECD) is at its highest level for 50 years and poor mental health is now the largest single cause of disability in the UK, according to the ISO. 

The good news is that the investment industry, with its power and ability to put businesses under pressure, has embraced sustainability. The bad news is that, in response, it might have accidentally ‘thunked’ up a ‘Glunk’ of its own: ‘ESG’.

Driving positive and lasting change

ESG investing, the process of incorporating environmental, social and governance factors into all aspects of the investment process, has undergone an incredible rise in popularity. It is a positive development, as it means investors need to think about more than just financial factors when allocating capital. We are yet to be convinced, however, that ESG investing truly grasps the urgent need to drive change on the issues we face. Failure to act will pose a threat to the functioning of markets, long-term performance and, more importantly, wreak havoc in our communities and the environment.

Asset owners have a key role to play in working with the investment industry to ‘unthunk this ESG glunk’ and get real about driving positive and lasting change. 

So how can this collaboration work?

First, asset owners can continue their great progress in putting investment managers under pressure to better embrace sustainability. This work is already having an impact and it needs to continue.

Second, we need to get smart about what does and doesn’t bring about change. Charitable organisations have great experience in this as funders and activists. They are very selective about where grants are given. They spend their time and resource on areas and communities where the need is greatest and avoid those that need it least. This is an important lesson to learn for ESG investors, as many seem to have taken the opposite approach. 

Affecting change where it’s needed most

Instead of driving the change that we need to see in the world, most asset managers have either focused on picking companies based on their ESG rating or are building thematic portfolios of sustainability leaders. While this feels right, ESG metrics are artificial and don’t relate to the real-world impacts (both positive and negative). By buying a company that is already a leader in sustainability, investors are only profiting from good activity that is already occurring, they are not encouraging more to happen.

We need to take a different approach. We want to go beyond ESG and the composition of portfolios, to be an advocate and catalyst for change by actively engaging with businesses. This is more akin to the foundation theory of change, achieving impact by working with those that need it most.

One example is in modern slavery. In the UK, for instance, the Global Slavery Initiative estimates that we import goods worth an estimated $18 billion each year that, in all probability, used slave labour in their production. Modern slavery is a human tragedy, but it also impacts the business and investment community. 

CCLA has formed an unlikely coalition between the investment industry, non-governmental organisations and academics to develop a new approach. Our Find it, Fix it, Prevent it programme asks companies: what are the outcomes of your anti-slavery efforts? We go beyond evaluating policies and look for results.

Although is it still early days, the programme is making an impact (also see engagement in the Gulf). It has led to companies commissioning new work and efforts to genuinely find and help people in difficulty rather than pretending that they did not exist. This collaboration can change lives, and we like to think it already has.

We all need to come together, unthunk the ESG Glunk, and get back to driving the change that matters most. The value of our portfolios, and the health of our environment and communities, depends on it. Otherwise, as the little girl observed of The Glunk, it will remain ‘a little greenish. Not very cleanish’.

Dr James Corah is Head of Sustainability at CCLA 

CCLA Investment Management Limited is authorised and regulated by the Financial Conduct Authority.
 

 

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