Does ESG Matter?
By Andrew Waitman, CEO of Assent
With increasing frequency, it seems, the next “big thing” arrives on the global financial landscape—attracting both avid proponents and fierce critics. Blockchain and bitcoin are good examples. Their benefits are often touted as transformational, but their downsides are mocked.
Another area receiving a lot of attention is corporate Environmental, Social and Governance (ESG) efforts. Given time, ESG has the potential to vastly improve transparency, accountability and comparative assessments of companies.
This is important, because true transparency is no longer just about financial reporting; it now requires broad disclosure of costs related to ethical and sustainable business practices. At its core, ESG is focused on these non-financial measures — the goal is to improve visibility, support good values and drive positive business practices. The objectives of ESG include reducing emissions of carbon and toxic chemicals, protecting human rights and promoting fair business practices. And, ideally, ESG measurements should extend to every aspect of a company, including its entire supply chain.
In some ways, ESG is not dissimilar to the investor protection measures introduced in the wake of the Enron and WorldCom financial fiascos. Like those measures, ESG can kick-start conversations about a company’s sustainability and circular economy objectives. Its underlying philosophy is that investors, rather than merely looking for short-term returns, are seeking companies with whom to have a long-term relationship. And those same investors shy away from companies whose profits are tainted by unethical or forced labor revenue streams.
The Complexity of ESG
For many, the ESG agenda has become essential to doing business in the modern world. It allows companies to mitigate potentially negative impacts and track improvements across numerous ESG-related topics. Naturally, for businesses, there is also a degree of self-interest in these ethical measures. While most genuinely care about sustainability, some may be driven primarily by the improved financial performance it brings. Others aim to meet minimum sustainability standards so they can avoid being dropped from an ESG ranking or index.
For all the proponents of ESG, there are also critics. Some critiques are practical: definitions and standards are still emerging, and are often unclear, inconsistent, and full of gaps. Pundits may grumble that published ratings by authorities such as S&P 500, are so capricious as to be meaningless. Other objections are conceptual: Some ridicule the whole idea of ESG ratings, seeing them as disingenuous greenwashing.
And indeed, with no real commitment to meaningful long-term sustainability outcomes, ESG benefits can be dubious. Companies can cherry-pick from a wide assortment of standards and, since reporting is often voluntary with no checks on veracity, the results are sometimes impossible to compare across industries.
The ranking system also attracts its share of grievances. Many companies are upset by the seemingly arbitrary nature of the measures used, or by the fact they are being ranked. They point out that the information is simplistic at best, or non-existent at worst.
Overall, though, companies have begun to take ESG seriously, and are devoting thought to their programs—even if these are only modest efforts.
ESG Requires Assessment and Commitment
Within each industry, ESG spans a broad set of themes, topics and values. One of the most important is decarbonization: the harsh realities of climate change demand action sooner rather than later. But each company must decide which issues are most material to their performance. Doing this assessment is one of the most crucial first steps in coming to terms with ESG. It is also why a one-size-fits-all metric produced by a rating agency often evokes the ire of companies that scored poorly - relevance matters.
ESG can be regarded as a tool for measuring performance, and companies can be active or inactive in pursuing its standards. Corporate reporting can be shallow and filled with invisible risks, or it can be deep and insightful, demonstrating a commitment to progress and transparency. Either way, ESG is not a binary measure; it is a journey.
One key issue that needs to be solved to help more companies embrace ESG is how to turn soft qualitative measures into hard quantitative ones with consistent results that can be reported and audited. The SEC recently proposed amendments to promote the consistency and reliability of ESG data and is also cracking down on misleading ESG claims— such as those made earlier this year by BNY Mellon Investment Adviser. The SEC charged the group, which agreed to pay $1.5 million in damages.
ESG is in its nascent stage and the rules are still being written. Over the past several decades, other regulations have forced companies to adopt tedious and complex data collection requirements. Each time, some businesses grumble, but despite the initial reluctance, they make the inevitable changes.
So, does ESG matter? From my perspective, the organizations that step into the future of their own volition — rather than being dragged into it — are the first ones to gain invaluable insights and market advantages that improve their businesses. And it is those organizations that will demonstrate why ESG does, in fact, matter. From the perspective of the concerned public, isn’t that a more productive path?
Andrew Waitman is CEO of Assent, the supply chain sustainability management solution dedicated to helping complex manufacturers bring responsible products to the world.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.