VALUES TO VALUE: This column comes to farewell ESG – environmental social and (corporate) governance – as we currently know it.
The ESG status quo serves noone well except the middle people who’ve made it up over the past two decades.
They’ve exploited a vacuum left by lazy, ignorant or ideologically corrupted policy makers, and quite possibly financially corrupted ones too!
At worst, they are grifters and rent-seekers; at best, they are well-motivated but still self-interested consultants, often from the big firms, and an assortment of rating bodies.
The right/conservatives condemn ESG for being too “woke”, and for interfering in supposedly “righteous” markets. The Left/progressives condemn it for being too weak, and for promoting greenwashing.
It’s more than possible that both are correct, but being damned from both sides doesn’t legitimise ESG as the centrist solution.
Many companies dread it because of the burden of responding to a succession of ESG questionnaires. Two hundred and even 300 questions at a time are common.
In 2021, EY (yes, one of the big accounting/consulting firms, I know) identified about 600 ESG reporting standards globally, the voluntary sustainability reporting equivalent of what the US military calls a cluster#$*@.
This coincided with the formation of the International Sustainability Standards Board (ISSB), at the 2021 UN Climate Summit (COP26) in Glasgow.
- The lack of comparable, relevant ESG information is a barrier in the transition to a more sustainable economy
- The ISSB is expected to bring organisation and clarity to the complex world of ESG reporting and disclosure
- It will be important for the IFRS Foundation to move quickly on a broad set of sustainability standards, recognise the dynamic nature of materiality and the need for local adaptation and supplementary standards
Since then, the ISSB has triggered a shift to mandatory climate and sustainability reporting around much of the world, which currently is being legislated in Australia – initially for climate-related financial information only – and will be phased in from 1 January 2025 onwards.
The long overdue arrival of mandatory reporting is one key reason why the voluntary ESG reporting version, or many versions, need to be rethought and reshaped.
Currently, the voluntary reporting season can be months of work for sustainability teams, lost time, year after year, when they could be working on real actions and solutions.
Some companies exploit it by defining sustainability in ways that suit them, rather than society, and game the ESG system.
How else could Philip Morris International, a leading global tobacco company, now vape champions too, emerge as an ESG success story? (Answering that is a job for a future instalment of this column.)
It all needs to be simplified, purified and re-focused, ASAP. Unlike a rising tide of action, a flood of self-regulatory complexity lifts no boats at all.
The net outcome of the ESG status quo has been that little actually happens to transform companies and deliver real action on the things that really matter.
These are:
- Climate
- Biodiversity
- Human well-being
Although I hesitate to suggest an alternative three-letter contraction, like CBH instead of ESG, or its predecessor CSR (Corporate Social Responsibility).
For me, the “G for governance” in ESG is core to its problem. It dilutes and distracts from what needs to be a laser-like focus on the “E for Environmental” (climate and biodiversity) and the “S for Social’’ (human well-being).
I can hear the tut-tutting already. What, turn a blind eye to companies being deliberately unethical? Or even just inadequately oversighted at board level, and poorly run at executive leadership team level?
There are, however, other ways for bad governance to be policed, and good governance to be rewarded for that matter, including the law, industrial relations, competition regulators, media exposure, and the markets.
I mean, personally I dislike Elon Musk and his carry-ons as much as PM Anthony Albanese and Tasmanian MP Jacquie Lambie do right now, or young international climate campaigner Clover Hogan for that matter. I’d be delighted to wave him goodbye on one of his own rockets to Mars.
He and his eccentricities, ugly antics and “X-factor” commentary are arguably a “G for Governance” disaster zone.
But even so, is that justification for electric vehicle and battery storage pioneer Tesla to be marked down in ESG rankings below Philip Morris International, the tobacco and vape giant cited above? (As Musk complained in 2023).
Surely wannabe investors in Tesla, even mum-and-dad ones, can work out if they want to be exposed to the Elon Musk factor, or not, without having an ESG nanny holding their hands?
ESG was born out of a CSR mindset, an exercise in hope over reality, that for-profit companies would embrace their corporate social responsibility, and do more and more good.
There are even examples of this happening. But it’s not the norm, and it’s not driving sustainability at the speed and scale required to make a real difference, for the climate, biodiversity and human well-being.
A Values to Value approach shifts the emphasis to “value at stake”. How any given business makes money and drives growth. The risks it is exposed to from environmental and social factors. And the negative, and also positive impacts it has on value for society.
Murray Hogarth is an independent guide to business and other organisations, specialising in positioning strategy, stakeholder engagement, thought-leadership and storytelling for sustainability and the energy transition.