Gloves come off in ESG spat

The debate over how companies can best combat climate change is becoming increasingly polarised and personal but consensus can still be found, argues Infinite Global director Patrick Tooher.

Terry Smith has had a very successful career in fund management telling it how he sees it.

Never one to take a ringside seat, the boxing enthusiast likes nothing better than to go toe-to-toe against prevailing investment trends.

So it should come as no surprise when in typically pugilistic fashion he took aim at Unilever, the consumer goods group where his Fundsmith Equity Fund is a top ten shareholder.

In a letter to shareholders, he said Unilever had “lost the plot” because it “seems to be labouring under the weight of a management which is obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business.”

He went to attack Unilever’s “ludicrous“ focus on sustainability and mocked efforts to give its brands like Hellman’s mayonnaise purpose.

In part Smith was venting his frustration at Unilever’s underperforming share price.

But he was also reflecting a view expressed in many boardrooms, often sotto voce, that the rush to adopt environmental, social and governance (ESG) standards had gone too far too fast, and risked unintended consequences.

As companies come under more scrutiny than ever about their ESG claims, the debate about how companies can best combat climate change is becoming increasingly polarised, political – and personal.

For example, one of the more ‘recommended’ comments at the end of this article in The Times  pointedly noted that: “If I was a Fundsmith client I would be more worried Mr Smith was losing the plot. Unilever isn’t trying to sell ice creams to billionaires who live in Mauritius, it’s trying to sell to urban millennials and Gen Z’s who care very much about sustainability and are not, by and large, fans of global food brands.”

Such polarisation and personalisation is a pity, for Smith chose his target carefully. In hitting out at Unilever, he was picking on one of the companies recently lauded by the Government  as an early adopter of new reporting standards that come into effect later this year. Over 1,300 of the largest UK-registered companies and financial institutions will soon have to disclose climate-related financial information on a mandatory basis – in line with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). This will include many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and £500 million in turnover.

Crucially, these new rules will force firms – in some cases for the first time – to account for the indirect, supply chain emissions that make up the vast majority of their carbon footprint.

Gaps between ESG rhetoric and reality will be exposed – even as arguments about accounting methodologies continue to rage. And no doubt Smith, who made his name revealing the creative ways companies accounted for growth in the past, will have his own view on the merits of Scope 3 emissions reporting.

But regulation and legislation can only go so far in holding companies to account on ESG. Ultimately the debate is about embedding more sustainable practices into business models, sooner rather than later.

That’s something surely we can all agree on.