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ESG critics must understand that ‘woke capitalism’ is driven by supply and demand

December 27, 2022, 1:15 PM UTC
The shift to ESG has been largely driven by investors.
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Amid geopolitical and macroeconomic turmoil, three years after the Business Roundtable’s landmark statement on the purpose of the corporation, stakeholder capitalism and its focus on environmental, social, and governance (ESG) issues are under attack. Critics of “woke capitalism” are now arguing that a strong focus on ESG is naive in times of economic uncertainty.

In my experience as a CEO of a company that works with 700,000 corporate directors and executives in over 130 countries, these criticisms miss the mark and fail to recognize the powerful push from customers, employees, and investors for organizations to stand for more than just financial targets. However, these discussions point to the urgent need to deliver on the promise of stakeholder capitalism–because discussions about climate change, inequality, and conducting ethical business relationships aren’t going away.

Those exclusively focused on short-term financial returns are sacrificing two things that are clearly in the interest of the very shareholders they champion: resilience and sustainability. Worse, they are doing it at a time of unparalleled, dynamic risk. Economic, social, and political change is unfolding at a record pace. Structural change–climate, technological, and geopolitical–is accelerating in ways never seen before. Discounting those existential risks in search of this quarter’s profits, as short-term capitalists counsel, is a fool’s errand.

Assailants of “woke capitalism” and purported government overreach miss that market players are driving the ESG focus. Yes, regulators play a role, but the real demand for action is coming from constituencies that we capitalists should believe in and heed: investors, consumers, and employees. For example, institutional investor support for ESG shareholder proposals has driven a sea of change in their adoption in recent years. A recent study shows that from 2006 to 2015 there were only four successful resolutions at Fortune 250 companies, compared to 41 in the past five years.

Finally, those who argue it is time to separate E from S&G are ignoring how corporations most effectively change their behavior. Yes, we can’t rely solely on private sector actors to save the planet, but the necessary reduction of carbon use by corporations will not happen if not directly tied to both people and governance.

It does not make sense to ditch ESG because standards and measurements are lacking. Rather, we need to fix them.

Thankfully, most C-suite executives and board members I interact with understand that while stakeholder capitalism and ESG may be imperfect, they are here to stay.

The bigger focus is on how to make ESG a real commitment and sustain momentum despite economic headwinds.

Amid today’s dynamic risk environment, more than 70% of risk and compliance professionals surveyed by Diligent and Censuswide felt their companies would soon be facing more pressure to act urgently on ESG. Evolving legislation and regulation and social responsibility vulnerabilities ranked on par with supply chain issues, cyberattacks, and market volatility as top concerns.

U.S. companies trail their counterparts in Europe, North America, Japan, and Australia in terms of environmental and social performance, according to a study of more than 5,000 public companies by the Diligent Institute and the Esade Centre for Corporate Governance in Spain.

Only successful implementation can quiet the skeptics of stakeholder capitalism and vindicate its proponents. There is no substitute for real-world impact–and three practical steps can help answer the persistent call of investors, consumers, and employees to embrace a long-term perspective:

  • Collect the data. We are well on our way to the easy part of ESG–making commitments. Unless, and until, organizations can effectively bring together the disparate sources of critical ESG data, they can’t effectively define, communicate, implement, track, report, and assess better ESG practices, net zero or any other commitment will remain just that.
  • Embrace diversity (broadly defined). According to the Diligent Institute and Esade Centre study, board diversity has the highest positive correlation with corporations’ environmental and social scores. Gender, age, nationality, and professional experience diversity among board members all drive improved scores on economic and social issues by companies. There is every reason to believe the value of diversity extends well beyond boardrooms to C-suites and beyond.
  • Bring focus to the task. Companies need to focus on ESG implementation at the leadership level to make it a reality. In the Diligent Institute and Esade Centre study, 12% of companies with dedicated ESG committees on their boards outperformed peers where ESG was handled in other committees or at the full board level. Beyond the board, ESG implementation is most effective when there is an empowered individual responsible across the organization. It is why I recently hired a new direct report to do exactly this at Diligent.

Rather than continuing a debate about ESG that will neither be satisfying to anyone nor solve any problems by itself, the time for concrete action is upon us. 

Brian Stafford is the CEO of Diligent Corporation.

The opinions expressed in commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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