In April 2019, the Allianz Life Insurance Company released an Environmental, Social, and Governance Investor Sentiment Study conveying strong consumer interest in supporting firms who can prove their good works. Now, with the reopening of the economy, there is a renewed focus on implementing ESG standards in American business, albeit with COVID-19 caveats.
Consumers are responding favorably to businesses who mitigate waste, contribute to community programming, and adhere to accurate accounting measures. Who wouldn’t?
Such practices are standard for businesses operating in good faith and reflect the traditional views of corporate social responsibility. The notion that firms should give back to the community (which is desired but not required) is also now viewed as a status quo strategy since philanthropic activities can improve the reputation of any business.
But such conventional examples of community stewardship are not what ESG truly entails. And the fact is, most people have no idea what ESG means when they see it discussed in the news.
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In the 1970s and 80s, the common but diffused desire for good corporate citizenship became institutionalized through government agencies like the Environmental Protection Agency and various nongovernmental organizations like the Human Rights Watch. This centralization shifted the interests of industry leaders and the general population alike. And, by the late 1990s and early 2000s, the idea of conscious consumption took root — however, this trend has since taken a more forceful turn.
In 2006, the United Nations highlighted ESG in its Principles for Responsible Investment (PRI) report and began asking countries to become signatories with a promise to meet PRI standards. Although abiding the espoused (and vague) principles outlined in the UN report is voluntary, pressure to do so is strong.
The UN has a financial interest in obtaining new signatories, charging fees to those who join. This is disconcerting for small firms or budding industries as they face international pressure coordinated by the UN to take part, yet they may lack the capacity to comply with the sustainability measures or the capital to join.
Moreover, the overall benefits of compliance with ESG standards outlined by organizations like the UN, the World Economic Forum, and the Sustainability Accounting Standards Board are often difficult to measure and the return is negligible at best, yet the global push for companies to publicly disclose ESG performance is mounting.
The overall benefits of compliance with ESG standards… are often difficult to measure and the return is negligible at best.
Organizations like the B-Team, a nonprofit initiative co-founded by Sir Richard Branson and Jochen Zeitz, attempt to legitimize this push by making unsubstantiated claims that our “economic model is broken.” Yet, the assertion of a broken model seems contradictory given the immense and measurable progress humanity has made in recent decades in such area as reducing poverty, improving environmental stewardship, and reducing child labor– all without internationally enforced ESG standards.
Assessments and monitoring mechanisms create roadblocks for innovative processes (since anything new or different will need to first be verified) and given that ESG reports tend to be politically inclined, critics of ESG metrics should speak up.
Unless challenged, certification schemes concocted by government agencies and international organizations will continue to develop. And new requirements, quotas, and systems for the application of ESG metrics will continue to expand given the purse strings and groupthink mentalities present with any form of centralized planning.
While investors want firms to be environmentally conscious, community oriented, and economically sound, they do not (and should not) want to cement themselves to fallible sustainability standards and subjective morality judgements that tend to be culturally dependent.
It may be a surprise to those implementing these programs, but creating what is essentially an ESG bureaucracy that systematizes standards, which may be beyond the reach of most small- and medium-sized businesses, impedes rather than empowers firms to improve.
Individualized approaches have always proved to be more effective than universal ones and, according to famed economist Ludwig von Mises, experimentation and diversification is what has served society best.
Industry leaders must remember that regulations and stipulations stifle innovation and any external dictates of institutionalized forms of measurement should be met with significant skepticism. Concerns regarding ESG are warranted, and not only because an economic link is often absent for participating firms, but more so since further fallacies will likely arise overtime.
Dr. Kimberlee Josephson is an Associate Professor of Business at Lebanon Valley College in Annville, PA. She serves as an Adjunct Research Fellow for the Consumer Choice Center and her research and op-eds have been featured in various outlets.
4 thoughts on “Dr. Kimberlee Josephson: Apprehension about ESG criteria in business is warranted”
So one point where the right seems to actually agree with the progressive left is that “corporate responsibility” is a neo-liberal/neo-conservative washing over of actual problems that corporations caused and/or exacerbated and/or let fester. (Just 100 companies are responsible for 70% of greenhouse emissions.)
Exxon lobbyists were even caught on camera saying they make empty promises to support progressive policies on climate that they know will never pass because THEY THEMSELVES are buying off politicians like Manchin and Sinema. They’ve even been caught paying off “scientists” to shill whatever fake science about the environment they tell them to shill while making nice TV ads about how they fund renewables.
But then the author loses me.
“Yet, the assertion of a broken model seems contradictory given the immense and measurable progress humanity has made in recent decades in such area as reducing poverty, improving environmental stewardship, and reducing child labor– all without internationally enforced ESG standards.”
I mean, sure the ESG didn’t exist yet but we’ve created public welfare systems to help and educate the poor, created the EPA (and its international equivalents), and passed new regulations to fight child labor all within the last several decades during which the author says we’ve made this progress.
The “immense and measurable progress” we made on ozone depletion is the DIRECT result of international standards and regulations on CFCs.
“ESG reports tend to be politically inclined,”
Sure. Any fact becomes “politically inclined” when major political parties make it central to their platform to simply deny them or explain them away with conspiracy theories.
“creating what is essentially an ESG bureaucracy that systematizes standards, which may be beyond the reach of most small- and medium-sized businesses”
yes, it systematizes standards which makes it harder for corporations to do the very green/pink/[other]-washing that both the right and progressives correctly assess to be a big problem. As for whether they’re out of reach of small and medium sized businesses – how? What exactly makes them “beyond reach”? And why would this support an argument to undo ESG rather than scale the standards to business size?
“Industry leaders must remember that regulations and stipulations stifle innovation”
The article you linked to, though behind a paywall, certainly doesn’t do a convincing job arguing this from what I can read:
“Moreover, recent decades have seen innovation stalled or rejected in a number of technologies. Nuclear power has been unable to roll out plans for new reactor designs. Genetic modification of crops was effectively rejected by Europe. The flow of new pharmaceutical drugs has slowed to a trickle. Ride-sharing apps have been banned in many cities.”
Nuclear power and other renewable tech has failed in large part due to fossil fuel corporations lobbying against them. And since when is a handful of elite tech companies taking over entire industries considered “innovation”? Be it social media, ride sharing, or providing internet service, I personally think competition is a good thing.
“As the investor Peter Thiel has pointed out, innovation is now largely a digital phenomenon, because bits are lightly regulated and atoms heavily regulated.”
I suggest that those not familiar with Peter Thiel read his wiki but for the sake of staying on topic, what proof is there that innovation becoming digital has more to do with regulation than natural changes to industrial and post-industrial economies? And if conservatives agree with his statement why do they want federal bureaucrats policing private social media companies?
I appreciate the thoughtful and constructive comment.
Recommendations and resources to inform businesses on best practices regarding ESG would be a better approach to having certifiers and global institutions requiring metric adherence. ESG designations derived from governing bodies or certifying agencies do not guarantee good outcomes and generate a pay-to-play model. Recent research has discovered that signatories to the United Nations Principles of Responsible Investment did not correlate with ESG improvements – the researchers noted that investors used “the PRI status to attract capital without making notable changes to ESG.” (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3555984)
Moreover, a representative of Sustainalytics noted in an October 2020 Harvard Business Review article (https://hbr.org/2020/09/the-challenge-of-rating-esg-performance) that “Creating the ratings is challenging work. There are no uniform requirements for reporting ESG information, and many environmental and social impacts are hard to measure. So the data inputs that we start with are fundamentally less structured, less complete, and of lower quality than financial data, which companies are required to present in standardized form and have audited by accountants.”
ESG ratings vary greatly according to who is monitoring, measuring, and reporting… a great example of this, as noted by Wealthspire, is how “Tesla has received an A rating from MSCI, a B- rating from S&P Global and a high-risk rating from Sustainalytics.” This is why apprehension for ESG adoption is warranted.
Sounds like the solution is to improve ESG rather than throw the baby out with the bath water or simply trust corporations to do the right thing based on recommendations when so often they have failed to in the past. You correctly point out that the notion that firms should give back to the community is not required so why would mere recommendations work? Historical examples since the dawn of the industrial revolution show that recommendations don’t work on their own and only pave the way for corporations to greenwash without having to make any real commitments.
The fact is, the EPA isn’t perfect, labor laws aren’t perfect, our social safety net is far from perfect etc. but their development, beginning with the industrial revolution and picking up over the last few decades, ARE the very driver of “the immense and measurable progress humanity has made in recent decades in such areas as reducing poverty, improving environmental stewardship, and reducing child labor”. And all these institutions work primarily through regulations and laws, not toothless recommendations. (I would grant that progress in reducing poverty is more complicated).
The clearest example of my point are the international regulations and standards enforced regarding CFCs. These are regulations that industries at the time argued would be too expensive and burdensome to implement. They may have even pointed out valid ways the regulations could have been crafted better. But we now know that these industries haven’t significantly suffered and, better yet, we haven’t burned a hole in the ozone layer. They tried providing resources and information on the harm being cause and nothing changed. There is a direct cause and effect relationship between when these LAWS passed and when CFC emissions declined.
Similarly, car manufacturers argued that safety requirements would stifle their business and lobbied against them. I don’t see any evidence that it has stifled car manufacturing but I do see that fewer people are killed per capita in car crashes.
Again, similarly, we were told that it would be impossible or too expensive to feed the world’s population without the pesticides detailed in Silent Spring but here we are. Spring is not silent and hunger has declined worldwide thanks to the regulations created in the book’s wake.
There’s certainly a more fundamental ideological argument here beyond just ESG. It goes all the way back to the beginning of the industrial revolution. It has always been and continues to be the wealthy corporate elite influencing politicians not to regulate them. They have always made the same arguments. And it has always been to the detriment of labor rights and the environment. It continues to be this way except for the fact that the wealthy corporate elite know enough to greenwash now.
I truly appreciate the engagement and interest in this piece. It is definitely an important topic to discuss! I guess I have more faith in the small business owner than the large bureaucrats formulating what is deemed necessary (rather providing recommendations/guidance, which you question would work). This is definitely an ideological argument about the role of individuals and role of institutions. Given that “the wealthy corporate elite know enough to greenwash” and are connected to (and can influence the direction of) government agencies, I assume we are on the same page then with the concern for ESG reporting.
There are many wonderful examples of entrepreneurs and nonprofits doing great things to improve our world (https://www.fastcompany.com/most-innovative-companies / https://causeartist.com/nonprofit-founders-impact-the-world-2020/) and this has come about due to interest, investment, and ingenuity… not systematized and centralized assessments, fees, and audits.