The concept of ESG has quickly taken over our sustainability vocabulary and knowledge, but its popularity does not translate into its simplicity; in fact, understanding the complexities of ESG is key for responsible non-financial reporting and investment.
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, and viceversa.
In fact, given the current dangerous trend of environmental degradation and social inequalities, the world is in desperate need of a strong rating system that ensures investors, companies and society that the positive impact they are creating is accurate and trustworthy. Here is precisely where ESG comes in.
However, the environmental, social and economic consequences of our current system and business models have moved so fast in recent years, that the latest data seems to portray a picture of ESG that is too far away from the kind of corporate social responsibility and sustainability that the world needs today.
This is why we wanted to understand what ESG really implies, or more specifically, what is the purpose of the latter, and contrast it with the current understanding and treatment 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.
Engage employees in the sustainability strategy
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 inflection 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
It turned out that such a rapid growth of ESG is not necessarily all that beneficial for the cause it is actually trying to improve, as many are already fearing the quick yet still immature ESG ecosystem; leaving investors and society to trust solely on the corporate world, 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 allow companies to gain high ESG scores even when they are detrimental to one or more factors or 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 needs 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 significantly undermine sustainable development.
In order to drive real ESG change, companies might have to sacrifice on high reporting scores in the short term by establishing quick answers to such big problems, and instead focus on doing good and pushing forward new and more reliable reporting standards that can replace current ambiguous metrics for a more sustainable and reliable reporting system.
Guide to good corporate governance
Engage employees in the ESG strategy
Sustainability cannot be a one department or one policy thing, it is only ever effective and productive when we integrate it throughout the company, meaning our sustainability strategy cannot thrive if it is not at the heart of employees’ and other relevant stakeholders’ everyday work and purpose.
How can we take action in order to engage people at every level of the company into the sustainability strategy?
In DoGood we believe that working collectively can help us find that which alone may seem unattainable or unimportant. That is why we think the workplace is the perfect environment to find that collective eagerness to make a difference, both for the sustainability and purpose of the company and a more sustainable way of being for all employees.