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.
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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.