Thinking beyond ESG alone when government climate action falters

by | Aug 11, 2022

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By Jack Chellman, Head of Strategy and Communications at the Global Returns Project

As Liz Truss and Rishi Sunak continue their campaigns, the UK Government’s commitment to climate action has come under renewed scrutiny. With neither candidate prioritising the country’s net-zero commitments, individuals might reasonably turn to financial markets for effective climate action in a post-Boris Britain. ESG investing is a powerful climate tool in the face of government inaction. On its own, however, it just isn’t enough.

Not-for-profit organisations provide the critical climate solutions that markets ignore and governments risk failing to deliver. Contributing to these organisations alongside one’s sustainable investments regenerates the planet beyond the capacity of ESG. These contributions also represent a rational investment decision – all our investments are less risky when we regenerate the planet.

Boris Johnson’s resignation set off a flurry of speculation on the future of the UK’s climate commitments. These questions also build on scrutiny of the current Government’s climate intentions – the High Court recently ruled that the Government’s net zero strategy breaches the 2008 Climate Change Act.

Anxiety about government climate inaction has become a global experience. A July update to the Climate Action Tracker finds not a single country’s policies compatible with the Paris Agreement’s 1.5°C goal.

In the face of uncertainty around government competency, some might assume that investing offers a more reliable option for delivering environmental objectives. Global sustainable investing assets already total around $35.3 trillion, indicating ESG and sustainable investing’s growing popularity.

Sustainable investing does give individuals an opportunity to act on climate without waiting for their governments. But, on its own, ESG’s limitations threaten both its environmental efficacy and its viability as a rational investment strategy.

Study after study has found that ESG too often struggles to deliver on its environmental promises. A March analysis by ClarityAI found that less than 4% of revenues in a selection of Article 8 funds could actually be classified as green. A July special report in The Economist concluded that ESG ‘risks setting conflicting goals for firms, fleecing savers and distracting from the vital task of tackling climate change’.[1]

Ironing out these flaws is vitally important. Even an ideal approach to sustainable investing, however, would struggle to address certain critical climate solutions.

Consider, for example, the successful suing of the UK government mentioned earlier. The not-for-profit organisation ClientEarth – along with Friends of the Earth and Good Law Project – submitted this landmark climate case to the High Court in January. Their victory in July gives the Government eight months to update its climate strategy to include a quantified account of how its policies will actually achieve climate targets. Markets, however, are not designed to hold governments accountable in this way.

Another example comes from the not-for-profit Whale and Dolphin Conservation (WDC). Research suggests that a great whale could be responsible for sequestering an average of 250 tonnes of CO2 every year over its lifetime. Since 2017, WDC has collaborated in identifying 15.7 million km2 of Important Marine Mammal Areas: areas of habitat that research suggests are crucial to the survival of species like whales. Markets are not designed to defend whales or their habitats.

The not-for-profit Global Canopy provides a final example. Global Canopy has helped develop Trase: a unique supply chain mapping tool which connects consumer markets to deforestation and other impacts related to the production of commodities like soy, palm oil, timber and beef. The French government uses Trase to support its strategy to end deforestation linked to imports of unsustainable agricultural products by 2030. Markets, however, are not designed to produce data tools for tackling deforestation.

As these examples demonstrate, not-for-profits deliver effective climate solutions that even the best sustainable investing struggles to address. Treating these organisations as a form of ‘asset class’ helps reveal their proper role in a rational investment strategy. While not-for-profits do not generate wealth, they do regenerate the planet beyond the capacity of sustainable investing. While they do not deliver financial returns, they do deliver real and identifiable ‘Global Returns’: the enhancement and protection of the biosphere. All our investments are less risky when we enhance and protect the biosphere.

When government climate competency is called into question, we cannot respond with sustainable investing alone. Contributing annually to effective climate not-for-profits regenerates the planet beyond even the best market initiatives. These regenerative solutions fill the gaps left by governments and, in the process, offer a rational addition to any asset allocation strategy.


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