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Corporate sustainability is not simple—and that’s a good thing

August 4, 2022, 11:12 AM UTC

Good morning. David Meyer here in Berlin, filling in for Alan.

The term “ESG”—referring to environmental, social, and governance metrics—has become rather divisive.

A host of top ESG executives complained at a recent Fortune gathering that the acronym is unclear and has been used inconsistently. Elon Musk, sour at Tesla’s exclusion from the S&P 500’s ESG index, recently complained that it’s a “scam [that] has been weaponized by phony social justice warriors.”

With all that in mind, I had a fascinating chat yesterday with the cofounders of British consultancy The Sustainability Group, which at the end of last year introduced a new platform called FuturePlus that aims to help businesses—of all sizes, though the initial focus is on startups and scale-ups—contribute to the UN’s 2030 sustainable development goal targets.

One of the founders, Mike Penrose, helped design the indicators for those UN goals; he used to be Unicef U.K.’s executive director and Save the Children’s global humanitarian director, so it’s no surprise that he and cofounder Alexandra Smith approach such issues from the perspective of looking at impacts first, before developing metrics.

“Because the majority of ESG indicators have not been invented by people who understand what impact looks like—they’ve been invented by the finance sector—what they’re measuring is something that’s easy to measure, not valuable to measure,” Penrose said.

“This tyranny of having to have something that’s financially quantitative, rather than looking at the qualitative outcomes and then talking about how you could create the deltas of measurement, has caused a lot of problems. An awful lot of the indexes out there are based on negative screening. They measure that you’re not bad, and not being bad should not be the global ambition of 2022.”

They’re not keen on the “ESG” term, either.

“The acronym tells you nothing,” said Penrose. “There is no clear understanding of what ESG actually is, other than trying to do better from a social and environmental perspective. That’s why we predominantly talk about sustainability, not ESG. If a business is sustainable, then it is sustainable from a social, environmental, and economic perspective, including around profitability. It’s not just a compliance issue.”

So what do they think about the argument that the different elements of ESG/sustainability should be teased apart, to be more useful and practicable? They’re not fans, to say the least.

“To consider climate, you need to really consider the environment and the social and economic impact of it, because if you only look at it under one lens, you miss so many potential downfalls and negative impacts,” said Smith.

This is where companies can find themselves vulnerable to accusations of greenwashing. For example, Penrose mentioned carbon sequestration projects that aim to capture CO2 from the atmosphere and store it in fast-growing plants—but that don’t look at the bigger picture.

“If you only measure the tons of carbon that are taken out of the atmosphere, it’s very easy to justify the majority of the projects that are out there,” he said, but many of those projects “are extremely harmful to biodiversity, because they’re introducing nonindigenous species that are better at carbon sequestration into areas not used to having them, and that affects the entire biodiversity of the area.”

“It eradicates underlying species. Ultimately it will take more carbon out of the atmosphere, but at what cost?”

Smith and Penrose want their methodology to become a standard. They certainly have a lot of competition on that front, and I’m not enough of an expert on sustainability to delve into the specifics of that methodology.

However, as a human being who wants to see companies have a better effect on our world, I certainly see great value in an approach that starts with real-world impacts rather than quantitative convenience.

With the ESG/sustainability movement still being at a nascent stage, and with the urgency of the problems that need addressing, now’s the time to think about framing.

More news below.

David Meyer
@superglaze

david.meyer@fortune.com

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This edition of CEO Daily was edited by David Meyer.

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