ESG Anyone?
What it means and why it's good for everyone
It’s no accident that the first result in my Google search for “ESG” turned up a post from Investopedia. ESG stands for Environmental, Social, and Governance–a concept that corporations have been using to strengthen from within in addition to building bottom-line profitability.
You know, corporations- the very same ones that always have our best interests at heart, steward our planet, and do the right thing [pause for laughter].
Businesses rarely adopt policies unless they lead to growth and (of course) a better bottom line. Celebrated American corporations including Deloitte, Pepsi, and Paypal boast their ESG commitments. So why has ESG created such panic among the MAGA wing? Why did fake elector and Arizona state Sen. Jake Hoffman introduce a bill prohibiting “discrimination” on the basis of environmental, social, and governance or other “values-based” criteria? Why did insurrectionist state Sen. Anthony Kern introduce a bill forbidding public investment in companies that have an environmental, social, and governance policy? Where, oh where has the conservatives’ cheerleading for all things business gone?
We can’t answer why these policies create such a meltdown, and have no intention of going down that rabbit hole. But we can describe what Environmental, Social, and Governance policies entail and why businesses adopt them–and it’s not because they’ve gone all squishy and “woke.”
According to Harvard Business School’s article The Triple Bottom Line, “Business leaders are increasingly realizing the power of sustainable business strategies in not only addressing the world’s most pressing challenges but driving their firms’ success.”
What business doesn’t want to endure and prosper for decades to come? Long-range strategy includes factoring in results beyond the next quarter. Firms are realizing that avoiding boom-and-bust cycles requires mitigating risks such as climate change, employee turnover, and slipshod management. According to the investment firm McKinsey, “The overwhelming weight of accumulated research finds that companies that pay attention to environmental, social, and governance concerns do not experience a drag on value creation—in fact, quite the opposite.”
Let’s dig in! Work these concepts into conversation at your next cocktail party - we guarantee you’ll be a hit.
Environmental
Whether they publicly recognize the realities of human-made climate change or not, many businesses factor climate into their planning as a recognizable risk and potential disruptor. Extreme weather and sea level rise can affect businesses regardless of location by endangering ports, destroying facilities, and displacing employees and their families. “These risks manifest in infrastructure and property damage (i.e. buildings burning down as a result of wildfires), operation and supply chain disruptions, power shut-offs, increased resource costs, business closures, increased insurance premiums, and market shifts,” writes Michael Sheldrick in Forbes.
“In creating our ESG Evaluations, S&P Global Ratings analyzed more than 2,000 studies on the impact of considering ESG factors in investing, and more than 90% found that these techniques led to either average or above-average returns.” —S&P Global, What is the “S” in ESG?
Sheldrick concludes, “It is crucial for prudent businesses and investors to consider how they can adapt to the impacts of climate change and climate-proof their assets. This involves assessing and implementing strategies to mitigate the risks associated with climate change, ensuring the resilience and longevity of their operations in the face of changing environmental conditions….Ensuring that a business has a clear strategy to manage the threat of climate change to its assets and overall productivity is about as financially prudent as you can get.”
“Ensuring that a business has a clear strategy to manage the threat of climate change to its assets and overall productivity is about as financially prudent as you can get.” Michael Sheldrick, Forbes
In addition to addressing climate risks, companies are realizing that the changing climate presents opportunities for increased profits. A changing social landscape leads to altered consumer preferences and presents a smart opportunity for investment. Clearly, the renewable energy industry will see explosive growth–it already is. But the ripple effect of “the economy of tomorrow” includes making massive investments in technology, infrastructure, and the service economy, as well as satisfying changing consumer demand. Cost savings materialize from reducing packaging, minimizing fuel, and creating efficiencies. “The common thread running through all the above opportunities is they are related to continued growth and asset creation, as well as improved risk management,” writes Pawan Mehra, also in Forbes.
Social
Building value from social considerations can be as tangible as an on-site child care center or as ephemeral as natural light in work areas. A corporate culture can make employees feel devalued and dismissed or trusted and encouraged. Guess which type stimulates productivity?
Employee retention can ensure that institutional knowledge sticks around, building a “wisdom bank” that fosters innovation and progress. Promoting from within sets a positive example and encourages the personal connections that grease the wheels of collaboration. Diversity and Inclusion models fit within a recognition that bringing a wide range of backgrounds, experiences, and perspectives into the business can open new opportunities and even new markets. (True story: when I worked at a major retailer, we opened outlets in Japan and hired a Japanese-American liaison. When our company president ooh’d and ah’d over a “minimalist Japanese book design”, the liaison had to point out he was looking at the back cover, not the front, of the book, since the Japanese language reads opposite of English. That was awkward.)
The rebounding organized Labor movement attests to the importance of a corporate social awareness–and blindness to the importance of employee satisfaction can lead to damaging strikes, slowdowns, and turnover. Strikes are not simply fueled by pay, but often by benefits and employee privileges that express appreciation and recognition.
But the “S” in ESG is not only an internal dynamic, it’s also the way the business relates to the community and the marketplace. Building trust between a business and local governing bodies makes new initiatives more viable. The inward mood of a company is usually reflected in its outward face and ability to thrive within a community. Attracting new employees who put down roots in the surrounding towns builds connections with schools, local businesses, restaurants, and shops.
Governance
Opposition to the “G” in ESG is the most baffling to me. Governance simply deals with building and maintaining a healthy, accountable management and oversight structure–without which businesses are likely to underperform or fail. Good governance is a question of good corporate hygiene. Failures in governance can lead to enormous, brand-damaging scandals, such as Volkswagen’s faked emissions scandal and the spectacular implosion of Sam Bankman-Fried’s FTX crypto-currency exchange.
S&P Global assesses companies’ governance performance by assessing four factors: structure and oversight, code and values, transparency and reporting, and cyber risk and systems. While it’s the responsibility of publicly held companies to deliver profits and shareholder returns, increasingly businesses are recognizing that all stakeholders should be factored in: shareholders, employees, customers, and communities. Indeed, over 180 CEOs of major corporations worldwide declared as part of the Business Roundtable that companies should concentrate on providing benefits to all stakeholders alongside deriving profits for shareholders.
“S&P Global Market Intelligence research revealed that firms with more women on their boards of directors and in C-suite positions had greater financial performance than less diverse companies.” S&P Global, What is the “G” in ESG?
Assuring that companies foster diversity in management and directorship roles has been proven to boost profitability: “S&P Global Market Intelligence research revealed that firms with more women on their boards of directors and in C-suite positions had greater financial performance than less diverse companies.”
Proper governance also oversees conflicts of interest and appropriate audits to ensure personal greed and corruption don’t creep in. The story of Enron’s demise is a master class in governance failure, and I can’t recommend enough the documentary Enron: The Smartest Guys in the Room and the book it’s based on by Bethany McLean and Peter Elkind.
ESG: Essential Success Guide (OK, I’m lousy at clever mnemonics)
Whew! Are you still with me?
What I’ve tried to demonstrate is that ESG policy is good business. Trying to stamp it out is witless, counter-productive, and simply impossible. Capitalism inevitably moves toward greater profits–that’s its nature. The most difficult part of ESG for outsiders and insiders alike to grasp, IMHO, is longer-term thinking instead of immediate rewards. Padding and shifting quarterly earnings was the downfall of Enron, and greed plus governance failures in the mortgage industry contributed to nearly bringing down the world economy in 2008.
Sacrificing enduring success for the rush of temporary stock market upticks is just a bad deal. And pitching a hissy-fit because you don’t like people and corporations being responsible and pragmatic is dumb. Bring on the ESG, corporate America!