What ESG gets right and what it can't do anymore

A reflection on business and the mindset shift ahead

Picture it: The management meeting of a large asset management firm. The CEO walks in and slams down the latest market projections.

“I just got back from vacation. I’ve been going to the same spot to relax for 30 years now, and I can tell you that it isn’t the same as it was. We’re missing something about how the world is changing around our investments. How can we explain it?”

The team looks around in befuddlement at each other as the murmurs grow. A young intern in the corner raises her hand. When the CEO points to her, she clutches her notes to her chest and pushes her glasses up higher on her nose.

“What about ESG?”

What happened next would kick off a multi-billion dollar investment industry, refocus the attention of sustainability professionals, and spark years of board-level confusion.

Bringing us to today.

OK, so this story is improbable to have happened. Still, something happened, and ESG, which never got much attention from businesses, suddenly became the shorthand for a couple of different things:

• Doing well by doing good

• Measuring and reporting your ESG data

• Serving as a catch-all for the shifting nature of doing business

The nature of business has changed…

We are asking too much of ESG right now because everything is ESG. Maybe it was coincidental that the attention to ESG issues was timed with increasingly worsening and more complex business operating conditions.

ESG was about 15 years too early, and by the time that intern raised her hand, it met a different need than when it was created. These non-financial issues have always affected companies, but their intensity has recently increased. So, in some ways, ESG has become shorthand for the insanity business leaders now find themselves in.

Heck, this is how I write about it every week!

ESG can help recognize, consider, and mitigate these issues and find new opportunities to pursue around this craziness, but it still doesn’t capture what’s happening or move people to action.

And the timing of the recent anti-ESG and sustainability pullback isn’t helping. While I covered the five people you meet in ESG last week, who I didn’t cover are the much larger groups of non-ESG people with budget and influence who believe this isn’t a focus area anymore or that it was nothing but a passing business fad.

ESG has been through the ringer so much that any minuscule headspace it took up in these people’s heads has been vacated, likely with more pressing and immediate political concerns.

Do we need new language?

ESG is well-defined, and I will hold on to its definition until the bitter end.

The material Environmental, Social, and Governance risks that affect a company and opportunities that drive toward long-term value and sustainable growth.

Still, we don’t have a word to explain this new uncertain operating environment in which companies operate. In other words, ESG doesn’t need to change; we need new language around a post-globalization, rising intangible, and interconnected world.

Like our CEO, I went on a bit of an adventure and searched for a replacement for ESG and the kind of language that could carry its weight in today’s complexity.

This is no small concept, as any word or phrase would need to capture the complex universe of pressures, a willingness to adapt and invest in near-term changes with the long-term in mind, and a mindset to recognize the need for ongoing shifts.

I chatted with ChatGPT to see if I could find terminology, pulling deep from foreign languages, science, poetry, and philosophy. Here are some suggestions of words with my interpretations:

• Exaptation: This word stems from biology and means an evolution for one purpose that serves another. For example, some birds evolved feathers for warmth, which later enabled flight.
  Exaptation is a little different from adaptation as it relies heavily on what the company is already doing well and applying it in new ways to new challenges or opportunities.

• Transilience: Wow, this word looks and sounds incredible. This comes from the Latin roots of across and to leap. It represents a sudden shift from one state to another.
  Transilience may not be as close to describing the type of change that companies need to go through, but it does represent the mindset shift that board directors and the management team need to go through if they are going to address these new challenges.

• Syzygy: In astronomy, a syzygy is the alignment of three celestial bodies, like during an eclipse.
  This is a powerful contender because, well, it represents ‘three’ like E, S, and G, and it is fun to think about an alignment in contrast to the infamously challenging ‘three-body problem’ in physics, where scientists try to determine the motion of three celestial bodies locked in gravitational forces.
  I know some leaders who see recent issues as intractable as this challenge!

• Kaizen: Kaizen is from the Japanese and means ‘change for the better’ or ‘continuous improvement.’ It captures what business leaders need to do, but it is already a business term, popularized by Toyota.
  It creates accountability across all employees to deliver ongoing improvements, something companies need to make the incremental changes towards sustainable and resilient business models.
  Still, like ESG, kaizen has been warped in some circles in the pursuit of cost-cutting and a ‘command-and-control’ management style.

• Palimpsest: I once had a poem published in a magazine called “The Palimpsest.” This word refers to a script or surface where the traces of an original remain or were scraped off.
  This, too, is close to what companies need to do in forging new paths on the old foundation.

Any of these words could be morphed and pulled into servicing a changed perspective in executives without mentioning the words we’ve come to know and dread like sustainability, environment, DEI, impact, and more.

Still, will anyone listen?

Maybe we need an anagnorisis

Last week’s write-up sparked a conversation about the language we use because some people you meet in ESG think the term isn’t that useful because companies should already be doing it.

This was effectively Hester Pierce’s dissent against the SEC Climate Rule. The SEC’s rule focused mainly on material carbon and climate risk issues, similar to ISSB. If any issue is material, shouldn’t companies already consider and report it?

Of course.

The problem is that companies don’t see it this way. They know climate risk and stakeholders are material, yet they include boilerplate language in their 10-Ks that reflect a disinterested approach, as if to say, “Yes, the climate is getting worse. Here's some legally compliant apathy. Enjoy!”

This is the mindset I am always trying to change and what ESG Mindset is all about.

So, perhaps we’ll return to Greek tragedies, as we visited a few weeks ago. What we need is an anagnorisis across companies. This word refers to that moment when a character sees something anew.

For example, I spoke at my alma mater, Penn State, at their Student Sustainable Business Conference last week. As I drove into and later walked around the campus, it felt different than a regular football game weekend. New buildings and paths were winding through the trees (although the squirrels were still all over). I realized that it wasn’t just the campus that changed, but I had changed, too.

As a reminder, the board has three primary fiduciary duties it must uphold to shareholders:

• Duty of Care: Taking reasonable action to prevent harm and manage risks, relying on all available information to make a quality and prudent decision for the company.

• Duty of Loyalty: Acting in the company’s best interest, not for personal gain.

• Duty of Obedience: Ensure the company follows regulations, bylaws, etc.

Like in my new perspective, these concepts have changed as the world has evolved, yet company leaders continue to look at business concepts as if they are ‘business as usual.’

The CEO in my fictional story had his anagnorisis and sensed something had changed. But sensing isn’t seeing. Seeing isn’t accepting. And accepting still isn’t adapting.

ESG isn’t designed to change minds, but it is well-suited to help us see how the world has changed and what we should do about it, wherever we sit in a company. Still, the world and its people are bigger, more entangled, and more urgent than any acronym can contain. We may need new language, but more than that, we need a new vision.

This moment isn’t about saving ESG. It’s about recognizing what it represents and answering the call of its risks and opportunities through perpetual adaptation in leadership, strategy, and mindset.

Are you ready?