One of the reasons that ESG will prove so difficult to relegate to its proper position as an investment niche for those investors who have specifically requested that their money (not other people’s) be invested that way is the amount of money ESG makes for the rent-seekers who graze in its ecosystem.
Daniel Hood, writing in Accounting Today (August 5):
In accounting, though, hundred-year floods have actually turned out pretty well. Just over a hundred years ago, in 1913, the introduction of the federal income tax created a huge demand for the tax preparation services that are practically synonymous with the modern profession. And just under a hundred years ago, laws passed in 1933 and 1934 in the aftermath of the stock market crash that launched the Great Depression mandated the second of the profession’s primary offerings — the public company audit.
Since then, comments Hood, there have been some helpful flash floods, Y2K, and Sarbanes-Oxley (a piece of legislation, I note, not without its problems), but no “hundred-year floods” until ESG.
Hood:
Recent explorations of ESG rules at the Securities and Exchange Commission, in California, and in the European Union are just the first tricklings of what’s going to become a flood of mandates for companies everywhere to report on the impact they have on the world around them — and they’re all going to need help setting up their reporting systems, and then proving that those systems are accurate going forward. Over the next decade, the scale of the need for these services will grow to at least match that for financial audits, and could potentially be much, much larger.
Notice that the “need” referred to is that imposed by regulators. Companies are already obliged to report material risks that affect their business. That’s what shareholders do need to know. And some of those risks may indeed be environmental. But, beyond that and the related obligation to disclose any material breaches of environmental law, is there (or should there be) any “need” for companies to “report on the impact they have on the world around them”?
No.
Hood:
This is work accountants were practically born to do. Some will object that the profession has no experience in reporting environmental issues — but neither does anyone else. What accountants do have is expertise in creating reporting systems, and assessing the accuracy and reliability of the output of those systems. . . .
It may seem odd to look forward to a massive flood, but now is the time for accountants to start channeling the growing streams their way, and to stake a claim to the rising waters. At the very least it’ll keep the profession occupied until whatever arises in the 2120s.
Very little of this work would, in a sensible world, exist, but that’s not the world that we live in. ESG is already a valuable source of revenue for management consultants, Wall Street financiers, academics, accountants, and, well, the list is endless. This group will continue to do everything they can to ensure that ESG is embedded in law, regulation, “standards,” and so on.
If ESG is to be pushed back into its kennel, there are a lot of vested interests that will be standing in the way.