‘We talk about the three Cs now: cost of living, climate and conflict’
KPMG’s ESG chief, John McCalla-Leacy, discusses the scale of the challenge ahead
ESG is a mercurial beast to grapple with at the best of times. Standards and regulation are yet to be consistently drawn up; definitions swing from a governance tool to an all-encompassing by-word for impact investing; and businesses and political leaders have begun a push-back as energy prices spike in the wake of war in Ukraine.
It’s even harder when you have to manage those competing interests across 150 different countries. But that is the task of KPMG’s new global head of ESG John McCalla-Leacy, who was lifted into the global position from UK chief at the beginning of October.
McCalla-Leacy’s brief includes the rollout of the ‘Big Four’ firm’s $1.5bn ESG investment drive and he has the unenviable task of pushing sustainability up the agenda to its sprawling global client base.
And he’s taking over at a time when business chiefs shift into survival mode and look to shield cash at all costs rather than readily pump it into a net-zero drive. That cocktail of pressures means many business chiefs still take some convincing of ESG’s merits, he says.
“We do still see some CEOs pushing back initially or engaging at simply a compliance or reporting level,” he tells Impact A.M. “But the way we talk about this is to say ‘don’t put off until tomorrow what needs to be done today’.”
While the knee-jerk reaction from business chiefs might be to row back on their ESG agenda, McCalla-Leacy says most realise that acting now will drive growth in the longer term and establish a softer landing when the next crisis hits.
“There is a change in the way we discuss ESG which looks at achieving growth and articulates it in a very different way. Now CEOs understand they need to make very significant changes in order to achieve growth,” he says.
The argument is proving a tricky one to win this year, however. Soaring energy costs in the wake of Putin’s war have caused countries to lean more heavily on fossil fuels once more, and public enthusiasm for net-zero and the ESG agenda more broadly is being tested.
Top investors are setting the tone and pouring cash back into the world’s oil and gas firms which have been soaring on global stock markets and reaping bumper profits from spiking prices. Just last month, the world’s biggest asset manager BlackRock was among a group of investors to tell a British parliamentary committee that it will not stop investing in coal, oil and gas.
But McCalla-Leacy claims that the ripples of war and the impending cost of living crunch are inexorably linked with the ESG agenda, and rather than easing off their ESG commitments, they should be doubling down.
“We talk a lot about the ‘three Cs’ now: cost of living, climate and conflict,” he says. “And our response is that CEOs need to balance; they need to build ESG plans that are also working to mitigate the impact of the cost of living and conflict.”
Part and parcel of that shift in mindset is treating the ESG agenda as a more holistic and congruous package. For many, the acronym will immediately foreground the ‘E’ and conjure up images of carbon emissions, tree-planting and electric vehicles. But McCalla Leacy says that ignoring the ‘S’ and ‘G’ underestimates the complexity of the challenge ahead.
“A great example is a large investment bank we work with that had money in a coal fired power station, and they said they could pull their funding out straight away and it would make minimal impact to their balance sheet, but it would decimate the local community, who relied on the jobs,” he says.
“So they were talking about the need to retrain people locally and make sure that their withdrawal does not hit the social aspect of that investment.”
The “just transition” – understanding and adapting to the needs of poorer and more under-developed economies in the move to net- zero – will therefore be central to the success of the global ESG drive, he argues. The hopes of protestors to “just stop oil” unfortunately may therefore be a pipe dream.
And it’s not just the moral and economic complexities that business chiefs need to navigate. The emerging and fragmented regulatory landscape of ESG is also posing a minefield for firms operating in multiple countries.
The UK has been more forward than others in its approach to rolling out standards and holding firms to account on them. The Financial Conduct Authority has, for instance, introduced reporting standards that require listed companies and asset managers of a certain size to report in line with internationally agreed standards.
In October, the City watchdog said it will also roll out standards to tighten the screws on the fanciful and profligate use of terms like ‘green’, ‘ESG’ and ‘sustainable’.
The pincers of public opinion and regulation are tightening on firms, but the forces battering the global economy mean the issue is a far more nuanced and complex one that simply shutting down the pumps.
And as he looks to explain that to an at-times reluctant client base that spans the globe, McCalla-Leacy’s task is certainly looking like a complex one too.