Solutions to avoid loss of environmental, social and governance investment

There are now very few global corporations that deny climate change. Senior executives have finally realized their future as profit-making enterprises depend on their ability to make money on a planet radically different from the one they knew as children. Their long-overdue enlightenment is the product of three decades of educational campaigns waged by civil society, academia and multilateral organizations. Those campaigns forced these corporate behemoths into action in the last half of the 2010s, when institutional investors, which provide companies with the financial capital they need to grow their business empires, demanded change. It was also clear that a successful strategy needs to be holistic, which led to a consensus that the solution should incorporate criteria encapsulated by three words: Environmental, Social and Governance (ESG).

Under previous iterations of sustainability programmes, companies sought to manage the environmental and social impacts from their operations in order to limit any potential legal or financial liabilities. The goal was to protect the corporate image and avoid angering consumers or provoking key stakeholders (i.e., local communities). According to the new paradigm, ESG strategies pro-actively support the planet and societal well-being in order to maximize profits over the short and long term. The goal is to align a company’s strategies and operations with the growing demand for the sustainable production of goods and services. Coincidentally, reformed corporate behavior will support the energy transition and save the planet.

Because ESG guidelines are being mandated by a board of directors, they are being integrated into strategic development plans at the corporate equivalent of the speed-of-light. Task forces have reviewed existing sustainability initiatives and repackaged their environmental and social components according to the new (slightly different) nomenclature of ESG investing, while linking them to an expanded (pre-existing) set of standards conceived to ensure ethical behavior on the part of corporate officers. The changes are subtle but significant. They are also controversial.

Critics on the left brand ESG investing as greenwashing, arguing that corporations view it through a public relations lens rather than as a true reform of business models. Their skepticism is based on the participation of corporations with a history of climate change denial and the ability of corporations to inundate ESG platforms with a myriad of data that de-emphasizes more fundamental measurements of environmental performance. Supporters contend the emerging ESG schemes are different in both scope and scale from previous sustainability initiatives, where the power of consumers was dispersed via complex supply chains and political processes. In contrast, investors will use ESG ratings to constrain (or enhance) the provision of financial capital, which is essential for corporate growth.

Critics on the right contend that ESG criteria distract from the fundamental purpose of a corporation, which is to create wealth for shareholders, while arguing that ESG evaluation systems are a hodgepodge of good intentions with no demonstrable economic benefits. Supporters, including the CEOs of the world’s largest financial services companies, respond by observing that successful companies have always invested in the capacity of their employees, suppliers and clients. Regardless, the Security and Exchange Commission (SEC) of the United States has proposed rules to obligate publicly listed companies to report climate-related information, essentially mandating the inclusion of ESG metrics in corporate reports.

The creation of the ESG evaluation and reporting system is an ongoing process with overlapping schemes composed of a bewildering assortment of metrics, guidelines, criteria, standards, frameworks, scores and benchmarks. At the corporate level, the scale pertinent for evaluating investments in the extractive industries in the Pan Amazon, ten financial rating agencies have launched schemes that combine information from corporate reports with independent data that, allegedly, provide an objective measure of ESG performance. The competing schemes often provide radically different scores for the same company depending upon what metrics are collected and the weights applied to different algorithms that pool hundreds of separate measurements into a single summary score. These scores are derived from thousands of data points, organised into hierarchical subcategories, which are compiled into sub-scores for E, S and G. System complexity causes ESG scores to be poorly correlated: a company may fare well in one scheme but be ranked as mediocre in another.

ESG in the Pan Amazon

Evaluations are compiled at the global scale and encompass many corporate attributes that are not relevant to the specific facilities and operations located in the Amazon. A very large company may have a good score overall, but a poorly conceived project in the Pan Amazon. Moreover, the global corporations that participate in ESG initiatives are not representative of the dozens of domestic mining companies that operate in the Pan Amazon. With few notable exceptions, domestic companies do not participate in ESG scoring schemes; those that do tend to be highly dependent on foreign capital or on foreign markets to commercialise their production.

There are at least 250 corporate entities operating or actively developing a mine, oil or gas field, or a logistical facility (pipeline, port, manufacturing) with a presence in Brazil, Ecuador, French Guiana, Guyana, Peru and Suriname. Of these, only a fraction (~18 per cent) can be found in the databases compiled by S&P-ESG (47), Refinitiv (46) or Sustainalytics (44).

The companies with the best scores are all global mining or oil giants whose ratings are due, in part, to their ability to build comprehensive monitoring programmes that collect massive volumes of ESG data. Well managed companies use the data to identify pressure points and bottlenecks, which can be modified at a reasonable cost to improve efficiency and profitability; it also allows them to flood rating systems with ‘positive’ data, while reaping additional points for data transparency. Companies that participate half-heartedly are penalised by blank data fields.
Among the high-scoring corporations are the mining giants Vale, Alcoa and Norsk Hydro, which operate massive strip mines near the Amazon River, as well as Glencore, BHP and Rio Tinto, which operate equally massive open-pit mines in the High Andes of Peru. The poorest scoring companies are the China National Petroleum Company and Sinopec, oil companies operating in Peru and Ecuador, and junior mining companies operating on frontier landscapes in Pará, Brazil. Following is a brief overview of selected corporations and their ESG scorings.

“A Perfect Storm in the Amazon” is a book by Timothy Killeen and contains the author’s viewpoints and analysis. The second edition was published by The White Horse in 2021, under the terms of a Creative Commons license (CC BY 4.0 license).

To read earlier chapters of the book, find Chapter One here, Chapter Two here, Chapter Three here and Chapter Four here.