ESG: What Bureaucrats and Buyers Want but the World Doesn’t Need

The expectation for firms to disclose information regarding environmental, social, and governance (ESG) matters is receiving increased attention in the mainstream media, and rightly so. ESG-based investments along with ESG-related lobbying expenses have substantially increased in a few short years. 

The traction ESG is receiving in capital markets is truly impressive, but not surprising given the trajectory of corporate social responsibility (CSR) over the past several decades. 

Throughout the 1980s and 1990s, a shift occurred within the business realm. The growing affluence of advanced markets was ripe for a moral charge. Live Aid garnered mass appeal, the World Business Academy was formed to address the role of business in society, and the concept of a triple bottom line (consisting of people, planet, and profit) came to be embraced by the business community. 

Also during those decades, the United Nations called upon the business realm and capital markets to play a greater part in global affairs and sustainability matters. Notably, the UN’s Finance Initiative (FI) within the UN Environment Programme, was launched to increase “the banking industry’s awareness of the environmental agenda.” The FI later joined forces with the UN Global Compact to connect the private realm to a greater degree with public agencies. 

In September 2000, at one of the largest gatherings of world leaders for that time, the United Nations Millennium Development Goals (MDGs) were established, and the MDGs later evolved into the Sustainable Development Goals (SDGs). These goals mandated support from the private sector and this expectation was reiterated by the International Business Leaders Forum in claiming that “the achievement [of the MDGs] will come primarily from private enterprise.”

As such, expectations for corporate actors to be agents for change have only grown stronger over time, and it is important to note that such pressure is not only being derived from intergovernmental agencies, but also each firm’s customer base. Since the 1990s, consumer behavior has consistently trended toward supporting organizations that propose a higher calling for business. 

From Bono’s RED Initiative being unveiled at Davos in 2006, to Fair Trade certification taking the coffee industry by storm, ethical and environmental labeling has become a lucrative marketing mechanism, and businesses have shifted their promotional efforts accordingly. 

In 2012, at the World Federation of Advertisers’ annual conference, industry executives declared social responsibility to be instrumental for building brands and revenue streams, and over time the UN’s Global Reporting Initiative (GRI), devised by the UNEP, was adopted for assessing and verifying ESG-related activities. 

ESG now dominates the business mindset given the upstream pressures from policymakers and the downstream interests of primary stakeholders. According to PwC, “83 percent of consumers think companies should be actively shaping ESG best practices” and, as documented by Deloitte, 97 percent of surveyed senior executives claimed that external stakeholders “have the most influence on a company’s ESG reporting and disclosure policy.” 

Currently, young and rising investors have proven to have a strong preference for ESG initiatives, particularly those connected to environmental concerns, and it is not just investors who are affecting firms and their stance on climate change but also the interests of their employees. Another study featured by Deloitte revealed that more than half of surveyed corporate leaders were influenced by “employee activism on climate matters.”

The prominence of environmental activists and social justice warriors within the workplace, as well as the marketplace, is proliferating. Higher ed elites have not only expressed the importance of ESG for their own operations, but also have incorporated SDGs as part of campus curriculum.

Similar to how MBA programs embraced the triple bottom line and CSR mantra in the early 2000s, ESG is becoming a central feature of academic studies. Berkeley, MIT, and Cornell have all launched prominent programs on ESG, and others are quickly following suit. And since what is studied in business schools eventually makes its way into business boardrooms, it won’t be long until Chief ESG Officers have a permanent spot in the C-suite. 

It seems firms are aiming to “align capitalism with what society wants from it,” as stated by Bank of America’s CEO Brian Moynihan at Davos last month, which is why it should be no surprise that more and more advertising dollars are being put towards corporate promotion of ESG every day. So, although criticisms of ESG are on the rise, a pivot in portfolio management back to frameworks focused on corporate growth rather than cause-related ones seems unlikely. Both buyers and bureaucrats are to blame.

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