After a backlash summer, ESG needs to get back in the game
In recent weeks, the backlash against the momentum driving widespread adoption of environment, social, and governance (ESG) policies became a thing. Perhaps most prominent was the broadside launched by Tariq Fancy, BlackRock’s former head of sustainable investing, in a Medium post that received both a torrent of opposition and several “thanks for saying what needed to be said” responses.
Much of the counterattack against ESG is ill-conceived and poorly argued. One of the chief arguments, that ESG is somehow responsible for government inaction, is wildly overstated. Binary arguments suggesting “all government or all business” approaches aren’t credible, or remotely reflective of how actual problems get solved in the real world. Other critiques indulge in rhetorical excess that doesn’t illuminate much. It is long past time to stop characterizing the serious business of ESG investing as the province of “do-gooders.”
All that said, even specious arguments can have some basis in fact, and there are ways that ESG needs to mature. These challenges to ESG came amidst news reports about the lack of follow-through on racial justice pledges, rising opposition by activist NGOs to the fast-growing set of net-zero climate commitments, and the curious silence of most companies in response to the draconian anti-abortion law in Texas.
Rather than let this debate devolve into the tribalism that is so dominant in our politics these days, ESG advocates should face the real (not imagined) flaws in ESG, both conceptually and in practice. Failing to do so will both enable critics to get away with broad critiques, but more importantly, it will miss the opportunity to meet the urgent need to shift the economy onto a more just and sustainable path.
With that in mind, there are three essential course corrections that should be made to ensure that ESG delivers the goods:
1. Set actionable targets to achieve and demonstrate real progress. Mark Carney famously spoke of the “tragedy of the horizon,” and how that promotes inaction today. The rising tide of long-term commitments is hugely important, and real progress is also needed, urgently. The world’s indicators are pointing in the wrong direction on climate, income inequality, and equity, and ESG cannot be judged solely on their promise.
On climate, for example, interim targets to be met by 2030 are essential. The real world demands it. Companies that embrace the Sustainable Development Goals logo should also demonstrate how they are ensuring progress towards their achievement. Follow-through on the welter of commitments to racial justice and gender equality is badly needed. Real, demonstrable progress in the “real economy” Is the best way to prove the worth of ESG.
2. Use real political capital to achieve policy change. One reason for the intense cynicism about corporate commitments is that companies expend far more political capital on reducing regulation and taxation levels than on advancing policies in line with ESG commitments. One prime example: two years after the Business Roundtable loudly proclaimed a new purpose, with stakeholders at its core, it is reported to be lobbying against legislation in Washington that would take decisive action on climate, address income inequality, repair the social safety net, and advance tax equity. Similar dualities are present with many industry trade associations. Companies will continue to face legitimate blowback if this blatant hypocrisy, whether directly or through their trade associations, continues.
3. Promote alignment of ESG measurement and disclosure. There has been some progress on this front. It needs to go further. Reporting and disclosure rules are, at long last, moving towards greater alignment. This process should accelerate. Companies have a key role to play in committing to approaches that can define the field and encouraging relevant regulators to redefine value creation, especially in public capital markets. This would go a long way towards combatting the view that ESG is too fuzzy and leaves too much room for greenwashing.
Amidst all the pain and disruption of the last 18 months, the rise of ESG, and the investment of significant resources behind it, has been a genuine bright spot. To make sure that this momentum is sustainable, it is critical to face up to the flaws that merit real attention, even if the avatars of the backlash are making mostly facile arguments. This is the best way to relegate the backlash to the margins, where it belongs.
Aron Cramer is the president and CEO of BSR.
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