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The term ESG (environmental, social, governance) shot into the limelight in 2004 in a report titled ‘Who Cares Wins’, a joint initiative of financial institutions and the United Nations. A principle which was considered trendy against the backdrop of climate change, with trillions of dollars of investments riding on its back, is now being dubbed by sceptics as ‘woke’, even as there is a subtle pushback from the corporate world.
‘Environmental’ refers to a company’s commitment to sustainability and environmental issues. ‘Social’ focuses on the organisation’s relationship with both internal and external stakeholders, including employees, customers, vendors, and the community at large. ‘Governance’ encompasses the entire spectrum of corporate governance like leadership, financial integrity, compliance, audit, and shareholder rights. A major part of ESG, however, comprises the environmental component.
Over the years, as asset managers have integrated ESG into the investment process, a term that has come to be known as ESG investing or ethical investing; that is, putting your money in companies that strive to make the world a better place. Investments are guided by ESG scores released by research firms. As sustainability investing takes environmental factors into account, companies involved in fossil fuel or tobacco usually do not figure in the list of fund managers.
Votaries of ESG argue that investors are ready to sacrifice returns in exchange for values like sustainability. But this is questioned by critics who say an ordinary investor is more interested in earning maximum returns for their funds than in the company’s commitment to ESG principles.
FMCG giant Unilever, which for long took pride in ‘leading the next era on corporate sustainability’, recently scaled back a range of ESG targets including pledges to halve food waste, hire more disabled staff, and reduce the use of plastic. “I am not going to shout that we are saving the world,” CEO Hein Schumacher told the media after the company came under fire from a section of investors for putting purpose over product.
Schumacher’s assertion that “corporate purpose is an unwelcome distraction”, is also reverberating across Europe where ESG activists are being accused of over-indulgence.
The Heritage Foundation, a conservative think-tank based in Washington, believes that “under the umbrella of ESG activism, corporations have become unimaginably woke”. The Foundation advocates that CEOs should focus on profit and not allow capital to be diverted from the purposes for which the company was set up. ESG, it argues, is value-destructive, politically motivated, and has a negative impact on investor returns.
In India, which is hoping to achieve net-zero emissions by 2070, there is pressure on companies to adopt stricter ESG principles. Now, the top 1,000 companies by market capitalisation are mandated by the Securities and Exchange Board of India (SEBI) to release a Business Responsibility and Sustenance Report (BRSR) to disclose their ESG performance.
However, a study by the Centre for Science and Environment (CSE) has found that BRSR disclosures conceal more than they reveal as companies often provide data selectively according to their convenience. Many companies, including those that claim to stand on an ethical pedestal, have been accused of ‘greenwashing’ or deceiving customers by making false claims about their environmental and sustainability compliances. Unless sustainability reporting is as consistent as financial reporting, it will serve no purpose.
The world has come a long way from the Friedman Doctrine of 1970 where economist Milton Friedman argued in a New York Times essay that the only responsibility of a company is to its shareholders and that it does not have any social responsibility to the society around it. Unfortunately, the Friedman Doctrine continues to influence many business leaders who believe that the entity should focus on maximising shareholder value rather than divert attention to ‘capital intensive’ social activities that are a drain on the company’s finances. Fortunately, many have also come to realise that the obsession with short-term shareholder value does not make long-term business sense.
Several studies have found that companies with better ESG ratings outperform their competition with lower ratings. Management consulting firm McKinsey & Company lists five ways in which a strong ESG proposition leads to financial gains: facilitating top-line growth; reducing costs; minimising regulatory and legal interventions; increasing employee productivity; and optimising investment and capital expenditures.
Business Roundtable, which calls itself the voice of leading American CEOs, has strongly expressed itself in favour of the ‘stakeholder model’ where the company serves the interests of multiple stakeholders. It reaffirms that only companies that align the interests of all stakeholders are successful and sustainable. It is thus important to shift gears from ‘shareholder capitalism’ to ‘stakeholder capitalism’. Entities can afford to take a myopic view of serving only their investors at the cost of other stakeholders and sustainability goals, at their own peril.
(The author is a certified independent director)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.