Beyond ESG and the S Factor
Companies looking for credibility in the eyes of their customers, shareholders, investors and employees find themselves needing to do much more than simply tick a few ESG boxes. They need a new type of institution to accompany them.
Is Goldman Sachs good for the world?
Is Goldman Sachs good for the world? It just agreed to pay $2.9bn to settle a US-led investigation into its role in the 1MDB corruption scandal. But then, it also recently “pledged” to invest $750bn in sustainable finance in the coming decade, plus it readily boasts of receiving A+ ratings for its sustainability strategy from the likes of UNPRI. So, what is your opinion? What would it take to convince you about Goldman’s corporate citizen credentials?
I, for example, would start by looking at a company’s lobbying efforts on financial, tax and climate regulation. After that, I’d like to look at a sample of those projects labelled “sustainable” and analyze their true impact in detail. Finally, I’d like to see the company relinquish some control; every corporation has a philanthropy operation — I want it to give to a broad base of effective grassroots organizations trying to even out the power balance in the society, and trust those organizations to do their job without interference.
ESG: a welcome but flawed proxy for sustainability
We don’t have institutions able to measure all of the above holistically and authoritatively. This shortchanges not only the citizens, but also the companies themselves, and their shareholders. I’m seeing executives exasperated and angry at the confusion and lack of clarity around the reporting standards and metrics. “The more serious you are about sustainability the more difficult it is to use the ESG framework,” an American CEO quipped during a Zoom call recently. “The more you probe it the more it falls apart.”
The framework they refer to, first developed more than a decade ago, is rapidly growing in prominence. It analyzes a set of Environmental(E), Social(S) and Governance(G) metrics as they relate to a business, from greenhouse gas emissions to staff diversity. The field of aspiring standardization bodies and data providers is mind boggling, although consolidation might be coming, driven notably by EU regulation.
The growth is a direct result of social pressure on business — from their investors, employees and customers — to be serious about saving the climate and promoting positive systemic change. Glossy corporate social responsibility pamphlets used to suffice to alleviate this pressure, but society has moved on and they no longer do.
Some of the ESG data points, for example the gender pay gap in a company, are easy enough to capture and there is great value in tracking them. Others are more difficult to pin down, such as a company’s full impact on the environment, counted up and down its supply and distribution chains. But investors have been happy to jump on the bandwagon and so “ESG assets under management” are growing, often aided by arbitrary definition and self-reporting — if you’ll be investing anyway, why not call it sustainable.
The framework is, of course, a very easy target for criticism. The whole exercise has been called a fraud, invented to appease the regulator and lower the cost of capital. It’s too much to say that. But if the role of ESG advisory was supposed to be to convince the public that a company was doing its part to advance the right causes, and if it can’t even convince the people using it, then we have a problem.
Why we need true sustainability arbiters
The solution, then, is a new kind of institution: a true arbiter. The work required cannot be done by a traditional rating agency, analyzing thousands of companies at once, relatively inexperienced in climate science or social change theory and practice. We need analyst teams which understand business as much as they do environmental standards, activism, tax law or geopolitics. We need those arbiters to tell us where a company’s moral compass really lies and what its total impact on the world is. We also need them to guide the companies themselves as they transform.
The Altruist League is trying to be this kind of an organization; we need many others. Their experience will be rewarding and challenging in equal parts. It takes hundreds of hours of assessment to truly understand a complex business’s impact — this pushes the price point far beyond that of a simple data provider. Many corporations still perceive this service as a cost, and are reluctant to put their resources and their best people on the case. Those that have woken up have understood the scary alternative: they’ll wait for years for ESG to standardize, they’ll tick all the boxes, they’ll take their reports to their future investors and customers, and they won’t be believed.