Climate action: Why ESG & blended finance are not enough

Steward leaders embrace a culture of innovation, encouraging experimentation and adaptation to meet evolving challenges. Merely adhering to the plethora of frameworks – ESG, sustainability, responsible investing – is not enough. (Illustration by Suneesh K.)

US$130 trillion. That’s the asset value the Glasgow Financial Alliance for Net Zero (GFANZ)’s membership now represents since its introduction at COP26. At COP27, it was announced that US$4 trillion to US$6 trillion needs to be invested in renewable energy every year for the world to reach net-zero emissions by 2050. At COP28, the UAE committed $30 billion to a climate finance vehicle.

Every year, climate finance takes centre stage at the world’s largest forums. And the numbers above tell us that we have the means to reverse our current trajectory. Yet, we’re still on track for temperatures 2.5-2.9 degrees Celsius above pre-industrial levels, far from the 1.5 degrees Celsius of the Paris Agreement.

Although there have been attempts at cross-sector collaboration like blended finance, the US$198 billion moved towards sustainable development in developing countries is barely 1 percent of the US$4.2 trillion per year needed.

Why are we not making meaningful progress on existential threats like climate change?

Same system, different outcome?

What we’re witnessing now is but a repeat of history. Mechanisms like blended finance and ESG frameworks are based on the very same system we’ve been using for the past century. When Milton Friedman wrote his seminal New York Times op-ed and argued that the sole responsibility of business is to maximise profits “so long as it stays within the rules of the game,” it was assumed that incentives and some regulation would safeguard societal interests.

Incentivise, regulate, measure, reward or punish. That’s how we responded then. Yet, as the Enron scandal, and many more since, showed us, regulations can be bypassed, and incentives create bad behaviour. With his CFO Excellence trophy in one hand and his prison identification card in another, Andy Fastow – Enron’s former CFO – was a striking example of the failures of this system.

(Infographic courtesy Rajeev Peshawaria)

Fast forward 50 years, and we’re calling for a more inclusive form of capitalism, one where businesses step up to solve existential challenges like climate change. And again, we’re overusing incentives, regulations, and measurement to drive responsible behaviour.

Blended finance and ESG frameworks are just different forms of the carrots and sticks we’ve been using. We can’t hope for a different outcome when we’re using the same mechanisms.

Values-driven value

The business challenge of the 21st century is finding profitable solutions to existential threats. The US$4.2 trillion we need every year to reach net zero is a huge business opportunity that few have leveraged. The ones that successfully do so are often driven by a purpose larger than themselves. They are driven by steward leadership, which is the genuine desire and persistence to create a collective better future for stakeholders, society, future generations, and the environment.

Faber-Castell’s Count Anton Wolfgang invested heavily in sustainable forestry in Brazil in the 1980s, although the trees would take 20 years to mature, and the rewards weren’t guaranteed. Today, the forests not only supply all the wood needed to make Faber-Castell’s famed wooden pencils, but they also neutralise the company’s carbon dioxide footprint worldwide while being home to more than 716 animal and plant species.

The future of the pencil industry was uncertain at that time because pencil usage was down. Many were arguing that it was a sunset industry.  There weren’t even any laws that demanded Faber-Castell protect biodiversity, but Count Anton did it anyway. He also voluntarily signed a social charter to commit Faber-Castell to apply the guidelines of the International Labour Organisation in all its factories and subsidiaries around the world.

The best business leaders who are motivated to drive the changes we need to address existential threats see themselves as stewards of planet Earth and humanity. Rather than simply focusing on measurement and reporting on their carbon footprint, steward leaders like Count Anton take ownership to create profitable solutions to today’s problems. India-based Tata Group has had a similar philosophy at its core ever since Jamsetji Tata founded the group in 1868. Commenting on the current over-obsession with measurement and reporting on sustainability, a director of Tata Sons once quipped to me, “When it comes to embedding social and environmental good within our strategy and execution, we measure less and do more.”

Steward leadership for innovation

Rules, regulations and measurements are indeed important. They provide a necessary foundation for governance, but they don’t create the innovation we need to meaningfully address today’s existential challenges. Often, they even stifle innovation by imposing rigid boundaries. Steward leaders embrace a culture of innovation, encouraging experimentation and adaptation to meet evolving challenges. Merely adhering to the plethora of frameworks – ESG, sustainability, responsible investing – is not enough. These actions must be undergirded by a genuine desire to pursue a worthy purpose based on stewardship values such as interdependence, long-term view, ownership mentality, and creative resilience.

Steward leadership is key to driving the change the world needs.

Rajeev Peshawaria is the CEO of Stewardship Asia Centre and the author of Sustainable Sustainability: Why ESG is Not Enough (Penguin SEA)