The polycrisis of ESG itself
Against the conflation of ESG and saving the world, brands bring common sense
In my work, I talk to some of the world’s Financial Services firms, biggest brands, and companies about sustainability, CSR, and ESG. While I broadly find any E, S, or G effort a company is undertaking in earnest to have its benefits and stakeholder intersection, not every effort is material. Therefore, not every effort is ESG.
Now language is a funny thing. As an English graduate, I try to be careful with my words. But, today, it can be too easy to get close to a definition and tweak the messaging to serve an opportunistic purpose. This has been happening with ESG since inflows into funds accelerated, and attention grew in late 2019 and early 2020.
Some Financial Services firms latched on to the opportunity to create new ESG products that instead aligned with people’s values to charge more in management fees. Some firms led with ESG risk but promised they were saving the world. Others built robust ESG investment strategies that look at ESG as it is - a mechanism for managing risk and uncovering future opportunities.
The result was investor confusion and dismay.
A few things contributed to this problem. Coming out of the renewed attention and annual reporting of the Nationally Defined Contributions at COP26, the murder of George Floyd, and COVID, pressure on companies to disclose has increased dramatically. I’d wager this has been executed thoughtlessly in aggregate with little consideration to impact and progress.
This problem isn’t anything new. Former SEC Commissioner Troy A. Paredes called out the challenge of disclosures in a speech back in 2013.
Disclosure is powerful, but that does not mean that more disclosure is always better than less. So I want to take this chance to emphasize a concern that I have discussed on other occasions. My concern is “information overload,” a risk of mandatory disclosure that has been present for some time and that is exacerbated as disclosures become more complex.
While ESG and CSR disclosures are not mandatory (lack of consistency aside), the pressure makes them feel like they are.
There is also another carefully constructed issue around ESG language. For conservative politicians, ESG has been incorrectly conflated with values, not value. The Utah AG is leading a lawsuit against the US Department of Labor’s new guidance that retirement funds can include ESG considerations. They argue that these measures are not pecuniary. This isn't a stretch in a world where some Financial Services firms have opportunistically latched on to sustainable investment strategies and labeled them ESG.
Unsolicited advice for Financial Services firms: Revisit and update your definitions and product information with clarity and intention before being called in front of Congress. Otherwise, you will lose this fight for everyone. This is an ESG risk of your own making out of the opportunity you were trying to create.
This hasn’t escaped the attention of SEC Commissioner Mark T. Uyeda in this amazingly titled speech: ESG: Everything Everywhere All at Once.
…some asset managers have been walking a fine line between hewing to their fiduciary duties to their clients and furthering social and political goals that may be unrelated to the interests of their clients.
This swirling hot mess creates a reductionist conclusion that ESG is bullshit and a placebo. Unfortunately, the reality is that’s what ESG has become for many. Still, this inflammatory language can stop material and ‘good’ projects from being started, or worse, canceled in this economic environment and may exacerbate board inattention to material ESG topics or operational reductions. This puts companies and their stakeholders at risk.
Last week, I posted a link to Why some executives wish E.S.G.' just goes away’. This was a look at executive ESG lamentations at Davos. Let’s revisit this read in the context of this new discussion.
Fixating on lofty goals, without delivering on actions, has made business leaders vulnerable to a backlash…The elevated messaging, and the pushback to it, has also obscured what supporters of the movement say are the real financial considerations of E.S.G., like what climate change means for a real estate business.
In other words, the intense focus on proving sustainability values with little impact, combined with the pushback on ESG, has gotten in the way of what is material, like the impact of the world on the company.
In a world of interconnected risks, ESG is at the confluence of its own polycrisis.
A significant risk with the confusion is that executives may miss the material issues they need to address. This may have already manifested in PwC’s 2022 Corporate Director’s Survey.
But at the same time, directors are less likely to see a connection between ESG and company fundamentals. Just 57% of directors say ESG issues are linked to company strategy, down from 64% last year. And only 45% of directors think that ESG issues have an impact on company performance, down nine points from a year ago.
The question here is how did directors interpret the question (i.e., what is meant by ESG) because, as we’ve seen, it has been conflated with non-material issues.
This past week, we discovered that some executives do get it.
Fortune (this article is gated) published an article titled, Coca-Cola and Novartis's CEOs don't care if 'ESG' has become a toxic phrase among some. The reason is simple. ESG is fundamental to the business. For example, the CEO of The Coca-Cola Company, James Quincey, stated:
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.
Imagine if a beverage company did not have a line of sight for its water usage. Look around at the challenge of plastic beverage bottle waste and wonder what risks there might be beside the planetary impact. Could new sweeping regulations impact their ability to package their product or even sell it? Remember when NYC banned sugary drinks? Quincey understands the risks, and regardless of what it’s called, he will address these issues because they are material.
Unsolicited advice for boards: Don’t lose sight of material issues in the current controversy of ESG.
This brings us back to last week’s newsletter and The End of ESG by Alex Edmans. While I am the ESG Advocate, Edmans and Quincey make good points. It truly doesn’t matter what addressing material risks and opportunities is called. Focusing on long-term issues is a fundamental business challenge that, regardless of non-material disclosure pains, boards who are paying attention won’t miss.