We are all familiar with the concept of ESG by now, referring to the different environmental, social and governance factors impacting the corporate and finance world. In fact, given the current trend of environmental degradation and social inequalities, the world is in need of a strong rating system that ensures investors and companies alike that the positive impact they are creating is accurate and trustworthy.
This is where ESG comes in. However, the trend has moved so fast in recent years that the latest data seems to portray a picture of ESG that is too far away from corporate social responsibility and sustainability. This is why we wanted to understand what ESG is, or more specifically, what is the purpose of the latter, and contrast it with the current understanding of ESG in the market.
The current state of ESG
ESG was born on the premise of doing good, helping identify the many realms in which a company can have an impact, both in a positive and negative way. It was furthermore understood as a tool for the betterment of society and helping advance the latter’s best interests. This idea suddenly became the answer to one of the world’s pending problems, the unresolved conflict between private enterprises, society and the environment, as it showcased a viable option to enrich investors, create profit for companies in the short and long term and take care of our decaying planet all at once.
As a matter of fact, during the sanitary crisis, there was clear evidence for the benefits companies with good governance and social and environmental responsibility policies enjoyed, contrary to those who suddenly found themselves with little to no protection over such risks, especially in the social or human resource realm.The result was a quick spike in money flowing through ESG funds, making the pandemic a point of inflexion for companies and investors who increasingly, and almost inevitably, acknowledged the benefits and need for being socially and environmentally conscious in their practices.
The inescapable reality today is that stakeholders as well as investors want better environmental, social and governance disclosures that will help them make better and more valuable decisions. In the same context, consumers, just like investors, also want to know the impact their choices have on the world; additionally, employees are more demanding of understanding and working for a company that helps drive better, more equal and sustainable communities.
Downplaying the potential of ESG
But it turns out that such a rapid growth of ESG might not be all too good for the cause it is actually trying to improve, as many are already fearing the quick yet still immature ESG ecosystem. There are many fundamental questions surrounding this matter that remain unanswered or vaguely addressed, leaving investors and society to trust solely on the corporate word, and therefore holding up the necessary path for greener investments and a sustainable society.
In this article we wanted to address two of the main problems obstructing reliable ESG metrics and investing today, as explained by the Stanford Social Innovation Review:
- On one hand, it seems as though ESG has more economic implications than actual social, environmental or governance ones. Current ratings tend to measure the degree to which a company’s economic value is at risk due to ESG factors; this is, a company might be a great source of pollution but still get a favorable ESG rating if the pollutive behavior is well managed and does not threaten the financial value of the organization in question.
- On the other hand, different weights might be put onto each ESG factor, but resulting in a final compounded score that can distort the real overall impact of a given company. The problem lies when the inconsistencies and variabilities across ratings permit companies to gain high ESG scores even when they are detrimental to one or more factors, stakeholders. When a company’s core business is significantly harmful, doing good on other parameters should not be a cover-up matter.
The sacrifice of rectifying
Rectifying these main issues would require an entirely new rating system that more accurately and reliably measures the human and environmental costs of market failures such as monopolies, limited competition, harmful practices affecting third parties or environmental damages. This way, companies would not get high scores when negatively affecting factors which cause significant impact on society or the environment.
The current state of environmental degradation and social inequities urgently need a shift on the ‘growth at all cost’ mindset that has come to rule the market for so many years, and which although slowly losing grip, still seems to undermine some sustainable development. In order to drive real ESG change, companies might have to sacrifice on profit for the long term survival, focusing on doing good rather than getting the highest ratings on increasingly ambiguous systems.
Transparency and ESG
We believe and work for transparency to be one of the key values driving the fight for climate action, social wellbeing and effective governance, as it is the only way to understand what we are doing wrong, what we are doing right and what it is that we are not doing yet.
Because being transparent is not only an externality to a company, or a given organization, to help build trust and reputation; it is in fact also a great learning and improvement mechanism. You cannot manage what you don’t understand. And so we advocate for transparency, integrity and precision as imperatives to the fight against climate change.
In DoGood we are convinced of the need to understand and manage efforts to achieve a sustainable transition inside an organization for the correct and efficient functioning of the business and the community it operates in. We alone cannot achieve the substantial changes necessary, but we work on the basis of collaboration, transparency and accuracy in order to bring light to sustainable actions.
In this regard, it is essential to our work to promote good corporate governance, meaning that the processes of disclosure and transparency are followed so as to provide regulators and shareholders as well as the general public with precise and accurate information about the financial, operational and other aspects of the company, including a more accurate definition of the ESG performance.
We have developed a corporate government tool that helps establish ESG impact objectives for employees in regards to the sustainability strategy of the company. Through our technology we are able to activate and track employees’ impact, creating engagement that translates into improved ESG metrics, reputational value and an overall positive impact for the environment and society.
If you want to know more about how we work to create a positive social and environmental impact, click here.