Corporate ‘Irritation’ Over ESG Fueled by Significant Costs

As ESG rapidly morphs into one of the least-loved labels in global finance, those monitoring the development say it’s not all down to ideology.

Instead, annoyance with environmental, social and governance metrics has grown along with regulatory requirements around ESG data, according to Alex Tamlyn, partner at DLA Piper and chair of the law firm’s boardroom counsel practice.

“There are some naysayers, flat Earthers if you like,” Tamlyn said in an interview. “But there’s probably more generally an irritation because, to respond to the regulatory obligation,” companies need to produce a lot of data, and “that means you’ve got to spend money on getting it,” he said.

The comments come as the European Union looks set to roll back some of its ESG requirements in response to concerns from its two biggest economies. The Corporate Sustainability Reporting Directive is now on track to affect far fewer companies than originally intended, after small and mid-sized firms balked at the sheer volume of the data demands they had faced.

The EU is due to tackle the directive together with several other pieces of legislation at the end of next month, as part of its so-called omnibus process.

At the same time, asset managers trying to screen for ESG risks have found they’re generally better off getting their data directly from companies, as other avenues fall short. Fresh research by DLA Piper and the Cambridge Institute for Sustainability Leadership indicates that shareholder proposals usually fail, and ESG ratings are often an inadequate guide.

As a result, asset managers are increasingly relying on direct, private interactions, according to the research, which looked at how asset managers and corporate boards tackle ESG challenges.

“The aggregation of data, the production of ratings and corporate governance indexes is notoriously not regulated,” Tamlyn said. “So you stand a better chance of getting better quality data if you have a private engagement for which you are responsible.”

Researchers plowed through databases to identify just over 37,000 proposals made at annual general meetings during the 10-year period ended in June 2024. Of those, 10% were ESG-related — and most failed.

Asset managers, meanwhile, have been stepping up direct engagement with companies. Between 2020 and 2023, engagement increased by almost 40%, according to the research, which focused on the stewardship activities of 40 of the world’s largest asset managers.

At the same time, there’s evidence to suggest that fund managers devoting lots of energy to their ESG strategies aren’t necessarily being rewarded by investment clients. Funds complying with the EU’s strictest ESG standards suffered record outflows last quarter, according to a research from Morningstar Inc.

Some of the “inertia” that boards are displaying “comes from a lack of comprehension as to where to start,” Tamlyn said. “If you’re advising FTSE 100 or FTSE 250 companies, the budget that’s available to mount a very sophisticated response to ESG challenges is usually pretty substantial,” but that’s not the case for smaller companies, he said.

However, companies that choose to ignore ESG do so at their own risk, Tamlyn said.

“There is an intrinsic reality about the environmental continuum, which is bigger than the opinions of any president or any country or any industry sector or any board in the world,” he said. “The consequences of that choice will be visited upon any business, any sector, any geography in the world.”

Photograph: Photovoltaic panels at a solar farm at the Bolivar Technological University (UTB), in partnership with Promigas SA, in Cartagena, Bolivar department, Colombia, on Thursday, Nov. 21, 2024. Photo credit: Carlos Parra Rios/Bloomberg

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