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ESG a ‘net good for business,’ expert says

EY’s Global Vice Chair of Sustainability Steve Varley joins Yahoo Finance Live to discuss the crossroads ESG is at, where sustainable investing goes from here, the policiticization of the practice, and differences between the U.S. and Europe.

Video Transcript

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AKIKO FUJITA: Well, ESG investing has seen rapid growth in recent years, as investors hope to capitalize on or incentivize companies to do better. But that meteoric growth now being checked by scrutiny over the broad standards of ESG, and those concerns that the issue is increasingly being politicized. For more on this, let's bring in Steve Varley. He is EY Global Vice Chair of Sustainability,

Steve, there has been a real turn, you could argue, in sentiment around ESG, after three years of massive inflows coming into the funds. I'm curious how you're watching this from a top down level. Obviously, there's a lot of storylines between what's playing out in Europe, how it's being politicized in the US, but as somebody who has really honed in on ESG, what do you make of the tide that's turning?

STEVE VARLEY: Well firstly, Akiko, thanks for the invite to come along and talk about what has to be one of the biggest phenomenons in business over the last maybe not three years, but at least five years. If you go back to the start of ESG, it's actually a term coined by the UN way back in 2006. So what we have now is a three letter acronym that's 16 years old.

I think we'd all agree is showing signs of being, well, maybe a terrible teenager. It's being misused in places and is also doing good in places. ESG I think overall, I would say from my conversations not just in the US, but Europe, Japan, China, is net good, net good for business. It's created a great dialogue. But let's see where we go from here, because we're definitely at a crossroads.

AKIKO FUJITA: And I know you have conversations with many companies on this particular issue. What's the sentiment right now around that?

STEVE VARLEY: I think it depends which of the letters you're talking about. The E, the S or the G. I think in Europe when you talk about ESG, you quickly go to E. And for many Europeans, E is synonymous with climate change. You come to the US, I think the E and the S both vie for leadership. There's so many social challenges here in the US. But also, especially with Biden and the IR Act, there's a lot more to be said now also on the environment and climate change.

AKIKO FUJITA: The argument is, of course, that when you look at all three letters, ESG, who's actually being included in these funds, they don't necessarily reflect what people believe to be ESG. Should investors be looking at measuring impact from these funds? I mean, the question is, we don't even know how to define it and how to measure it.

STEVE VARLEY: Yeah, you're quite right in saying that. The standards are really immature here. If I compare them to financial standards, which is our EY heartland. We're quite some way away of having standards I think where people on the street can do good comparisons. I think the investors need to really work out what are they trying to do with their dollar.

So if you really want to do well on climate change, well then, look at an ESG composite rating where an organization's roll out the numbers to say, this is an A-plus or a BB, that's probably not good enough. You need to go to the next level down really to understand a lot more about where your dollar is.

AKIKO FUJITA: What are you seeing in terms of inflows to the funds right now? Just pulled up a number from Bloomberg Intelligence that points to a pullback in the inflows that we've seen after a three-year spike. Some would argue that over the last three years, even though ESG's been going on for a while, that everybody just threw any company into ESG because the returns were so significant.

STEVE VARLEY: Yes, and I think now if we look back, we might start to speculate that some of those returns in ESG funds were actually driven by the technology stocks. And once we came out of the pandemic and the technology stocks came down a bit, so did the ESG funds. So on a global basis, I think there's a pause going on. There's nowhere near the level of influx we saw two or three years ago where ESG was really being touted as a kind of miracle cure. You could do well financially, and it could do good in the world. I think we're taking a pause in that definition now.

AKIKO FUJITA: So what does the shakedown look like moving forward? You've obviously got regulation in Europe already in place. Here in the US, the SEC has put forward these proposals. The comment period's over, but as we wait for the SEC to say, yes, in fact, these are going to be the disclosure rules, you've got Republicans in some states, Democrats in others, that are saying we're just not going to be investing, at least in our pension funds, allow them to go through the ESG fund.

STEVE VARLEY: Sure. I would say actually in the US, this is a real lightning rod topic, isn't it. Very different to my view of what's happening in Europe, in Africa, and the rest of the world. In the US, ESG has become far more politicized than I've seen it happen anywhere else in the business world. We're definitely at a crossroads for ESG.

I don't really know where it's going to go in the next 12 months. But let me go back to one of my starting points. ESG's been net good for business. It's created the right dialogue on the right issues. As all of us in business start to think about the externalities, what else do we affect. This is not just about profit, this is about the impact we have on other stakeholders, like the planet, like society, that's got to be a good thing.

AKIKO FUJITA: You said, you don't know where it's going to go moving forward. What does that mean from your operations? I mean, this is really the sole focus, at least when you think about being the Vice Chair of Sustainability.

STEVE VARLEY: Well, we're watching very closely to see where Gary Gensler goes with this in the SEC. We submitted our comments back to that consultation. We think that a lot of the measures will be toned down. That'll make a real big difference though to the EU, where the EU is still going really strong to regulate this whole area and really expect a lot more from companies in their reporting.

So one thing we do know for sure is, there's going to be a division I think between where the US is and where the EU is. And Akiko, for big global companies, that's just going to make their life a lot harder as they have to now work in two different regimes.

AKIKO FUJITA: What is that going to mean for EY?

STEVE VARLEY: Oh, well, for EY, I think we going have more clients who want more advice on what to do and how to navigate all of these things. And Akiko, let me say, we're always here to help.

AKIKO FUJITA: It's going to be a lot more muddled it sounds like, the landscape moving forward. No universal standard there, certainly not expected at least in the short term. Steve Varley, EY Global Vice Chair of Sustainability, good to have you in studio today.

STEVE VARLEY: Thank you.