The ESG Advocate's 2024 Letter to CEOs
No, you can't actually ignore ESG
Dear CEO,
First off, I hope you had a safe flight to Davos. It seems like only a year ago, you and your fellow CEOs were lamenting the growing popularity of ESG. Well, I have good news and bad news.
The good news is that all the hard work of ranting and raving from the anti-ESG crowd has normalized a pullback in the term, so congratulations! The bad news is that the regulations aren’t going away, and even more critically, you can’t actually stop thinking about ESG because risks haven’t ended, and your competition is still working on it.
But, I’ll admit, since ESG has grown in attention over the past few years, you and your company have had a rough go. Let’s move into two apologies on behalf of financial services firms. First, investment firms haven’t consistently defined their expectations in the 20 years since ESG was created. Labels like sustainability, green, and ESG were recently added to funds and investment vehicles with little meaning as the opportunity grew to capitalize on a newfound global sense of purpose. Second, someone thought this data needed to be comparable, leading to a substantial regulatory disclosure push. These two forces have led to what I suspect will now be annual regret at Davos.
As you engage with others this week, you might hear that California hasn’t funded its upcoming climate regulations and that the SEC has pushed out its climate rule to April at least. Don’t get complacent, as the EU is leading the way, and globalization means you need to pay attention. France is an early adopter of CSRD and has stated “that fines for various infringements could be up to €75,000 with the additional threat of five years imprisonment.”
From financial services to fines, all of these issues have caused and continue to cause you pain, and it is only getting worse. As the EU and US have launched rules to label funds and financial products more accurately, the markets are pulling back on ESG and sustainably marketed funds, causing even more confusion. Don’t worry about the pullback of labeling, as it has nothing to do with you or the issues and more with the correction of the over-zealous opportunities that firms were trying to capitalize on.
Still, there’s even more! Conservative politicians in the US have railed against ESG in a confusing and muddying mess of Congressional hearings, pension reallocations, and even banking blacklists. And during 2023, you had to watch Bud Light, Target, and other brands fend off manufactured reputational risks as they tried to capture ESG opportunities. Wondering if you are next is undoubtedly a bad place to be.
But, coming out of the 2020 Social crises of COVID and the tragic murder of George Floyd, and with the increasing frequency of extreme weather events, your company is also still sitting on stakeholders, specifically employees, B2B customers, shareholders, and consumers, who put pressure on you to disclose and undergo a sustainable and socially just transition.
These new accountabilities, emerging risks, and shifting social norms are certainly keeping you and your management team on your toes!
Enter an article that you should be wary of. Last week, the WSJ published The Latest Dirty Word in Corporate America: ESG. I understand you probably don’t have time to read beyond the headline because you have a business to run, so here’s a summary of the article:
Management teams and companies are fed up with the anti-ESG pushback and the confusion around the term. As a result, they are backing away from the acronym ESG in some cases, but not the work.
What is that work exactly? Well, again, it’s primarily been poorly defined, but here’s what you need to know:
ESG represents your material Environmental, Social, and Governance issues that impact your company, less so from your company’s impact on the world. There is an intersection there, but as Daryl Brewster, a former Kraft Foods and Nabisco executive who now heads Chief Executives for Corporate Purpose, states in the WSJ article:
ESG is complicated.
Look, there are no easy answers here. In today’s world of interconnected risks, globalization, and intangibles, you cannot ignore ESG because these are core business challenges, not values-based concessions. Still, values may play a material role depending on your stakeholders. ESG represents interconnected pillars that can help your company address these challenges.
Let’s look at an example. The WSJ article notes that Coca-Cola has rebranded its corporate reports and committees, stripping ESG from the titles. Here’s what James Quincey, the CEO of Coca-Cola, has said about ESG previously:
If ESG becomes toxic as a phrase, which it basically has in the U.S., it doesn’t matter to me. I’m just going to stop saying ‘ESG.’ But the idea that for my basic product, I want to be water positive, I want to have a circular economy on my packaging, and I want to grow our business with less sugar—you can call it anything you like, but no one with common sense says those are bad ideas.
Quincey lays it out wonderfully for us with an example of a material Environmental issue, water, and the growing reputational risks of packaging and consumer health. These are examples of ESG considerations in his business.
Even back in 2005, the UN Environmental Programme Financial Initiative recognized the connection between ESG and core business in this way:
Conventional investment analysis focuses on value, in the sense of financial performance. As we note above, the links between ESG factors and financial performance are increasingly being recognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.
In other words, if you aren’t focusing on ESG, you will likely overlook key financial performance considerations. This doesn’t mean the fines for ESG disclosure non-compliance or reputational risk like France is threatening, although that could be a part. This also isn’t the movement of favorable lending terms or garnering positive activist investor attention. Instead, ESG is where your business intersects with these topics. These may be non-comparable things, as Quincey explicitly describes for Coca-Cola.
So, when you see Texas Attorney General Ken Paxton say this in the WSJ article:
If this trend is decreasing, these CEOs must have realized that this puts them at greater legal risk and costs them customers.
Recognize that he has defined ESG in a specific way, one warped by the markets to capitalize on their opportunity and co-opted by the anti-ESG crowd for a self-serving political purpose. As stakeholder pressures and reputational risks grow, the anti-ESG crowd rages against sustainability and systemic social justice. If you lead with their surface-level threat, the result may be more than reputational damage. Your company may miss the material intersections of ESG issues with your business, putting your company at risk.
It would be more responsible to say:
If this trend is decreasing, a CEO can’t realize the full potential of their business and is therefore absent in their fiduciary duties, exposing the company to risks and likely reducing shareholder value.
You cannot stop the work, regardless of what you call it or how others frame it.
So, take a bit of comfort. If you need to, let ESG be the fall guy and call it ‘responsible business’ or whatever you’d like instead, as the WSJ calls out. ESG is, after all, responsible business.
Now, there is value in the acronym in thinking through these issues. In April, I will release a book called “ESG Mindset” from Kogan Page, explaining this value, but you will have to wait to find out how.
In the meantime, let’s close as the WSJ article does with a quote from Brewster:
“You can be anti-ESG,” Brewster said. “It’s hard to be anti-responsibility.”
To which I’d caveat this with Brewster’s earlier quote, “ESG is complicated.”
You can be anti-ESG in the activist way that conservative politicians have defined the term. If you do, your company may face fines or reputational risk, and you certainly won’t save the world or be prepared for a transition.
In operating your business, you cannot back away from ESG because that would mean ignoring material Environmental, Social, and Governance issues that affect your business.
Do this at your peril and financial risk.
Sincerely,
Matthew Sekol
The ESG Advocate