What’s the Story?

The FT reported last week that Bernstein has issued a paper to investors saying they should take a broad view on how companies manage Emerging, Strategic and Disruptive matters, collectively ESD.

ESD factors include environmental and social risks, geopolitical exposure, and disruption due to AI, which goes far beyond the classic ESG footprint of issues.

The ESD automotive industry example includes new carbon emission regulation, critical materials access, protectionist trade packs and talent gaps unmasked as the electric and autonomous vehicles shift unfolds.

Bernstein believes many investors over rely on corporate disclosures to assess major portfolio future risks and opportunities. A deeper investor engagement with wider issues is needed.

ESG is FT highlighted too by a report on DWS, the FM Deutsche bank subsidiary getting a German €25 million fine on top of the $19 million SEC settlement, for exaggerating the use of its ESG Integration Framework. But executive criminal probes are now dropped.

Why Does it Matter?

ESG factors matter to investors, and so executive incentives regularly include ESG metrics for top companies.

That said, some believe ESG is a fad and that ESG is “woke capitalism”. In fact, the US President is reported to believe that climate change is a hoax.

This negative mood music means that company reporting and websites have trimmed back their ESG emphasis and some companies have downshifted environmental and DE&I goals as well.

ESD is markedly not the same as classic ESG. The ESD footprint is broader and more investor logical than ESG.

Companies and investors should recognise this and refine and promote internally the protocols to systematise the assessment and management of ESD factors.

Newspoint View

Driving your car fast forward while you look in the rear view mirror is unwise. Doing so as you hit the accelerator doubly so.

In a world changing rapidly and at increasing pace, the impact of future issues on the shape of the current business is massive.

Bernstein has hijacked the ESG moniker for instant attention. That underserves their thinking. While part overlap is seen, ESG and ESD are different, with ESD more important by far.

Shares trade on future earnings expectations. “The past in no guide to the future” is the warning flag. But what company information is provided about that future?

ESD is an insightful way to focus on vital forward looking major corporate aspects. The normal backward looking corporate financial and compliance reporting fails to capture the huge pool of churning future change. The auditors issue an opinion on the past financials alone. That is good but insufficient. New insights are essential

Before the “defund ESG in incentives” movement takes root, the ESD concept needs time to grow, it is a valuable tool.

The old saying runs “The past is a different country, they do things differently there.”

Well, that’s true for the future too.

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