A group of researchers wants corporate America to work towards removing uncertainty around environmental, social, and corporate governance (ESG) practices and metrics.
I had a conversation with David Larcker, a professor emeritus of accounting at Stanford Graduate School of Business. Larcker and his colleagues recently published the report, Seven myths of ESG. He says the use of the word “myths” is academics attempting to be provocative to drive home a greater point.
“I’m really pro-diversity and really pro-climate,” he told me. But Larcker and others in the group think there are assumptions about ESG that “need to be made explicit,” he said.
He gives an example: “So you shut down coal [mines] because of the carbon issue. And that really improves the ‘E’ in ESG. But the ‘S’ part becomes really important. You’ve got a bunch of people that are in their 50s, they’ve been coal miners, what will they do? There are really serious tradeoffs.”
The seven myths stated:
1-We agree on the purpose of ESG
2-ESG is value-increasing
3-We can tell whether a claimed ESG activity is actually ESG
4-A company’s ESG agenda is well-defined and board-driven
5-G (Governance) belongs in ESG
6-ESG ratings actually measure ESG quality
7-Mandatory disclosure will solve the problem
Well, the myths researchers state basically cover all of the areas involving the execution of ESG practices and measures. Along with each myth, they provide examples to support their argument. For instance, myth #4: “A study by Willis Towers Watson finds that, while half of S&P 500 companies include ESG-related metrics in their annual bonus programs, only 4% tie the value of long-term awards, where the bulk of CEO wealth is generated, to the achievement of ESG objectives. Instead, most companies appear to develop ESG priorities and investment in reaction to internal and external pressure.”
During Fortune’s recent Modern Board virtual event, directors explained how rising demand for environmental and social standards is creating pressures in governance. “We have employees pushing so hard on any CEOs who are laggards in this space,” Amy Chang, a director at Disney, Procter & Gamble, Marqeta, SambaNova, and Pragma, said. The directors discussed best practices for measuring ESG. But what makes the standardization of ESG measures so challenging is an organization’s relationship with society and the environment can greatly differ depending on its industry, they noted.
I asked Larcker how companies can address the uncertainties of ESG over the next few years. “It starts with, at some point saying, is this data really, correct?” he said. There were a lot of DEI pledges made by companies after the killing of George Floyd, Larcker said. “What did companies actually do? And did it have a desired impact?” he said.
For best practices in ESG overall, “I think what’s going to happen is, it’s going to be some really sensible companies that come forward and set the tone,” Larcker says. “And then they’re rewarded by their shareholders and stakeholders.” And others will follow, he says.
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