The Rise of ESG, Replacing Profits With Paternalism, and Strategy With Standards
For-profits are increasingly embracing the concept of conscious capitalism and stakeholder integration, which the likes of John Mackey and Sir Richard Branson have not only championed but built movements around, calling on businesses to have a “Higher Purpose” and commit to creating a “better world”.
At face value, this sounds like not only a good thing but a strategic move given that consumer preference leans toward firms that aim to have a social impact rather than simply sell a product.
When the concept of CSR first came about, it was applicable to larger firms that had the ability to utilize their wealth and success for giving back – by volunteering, giving to charities, and even partnering with NGOs. However, CSR is no longer about giving back, or even paying it forward – it is about engagement with social issues – and this is now expected of all firms.
The Push for SDGs and Rise of ESG
The pressure to ‘do good’ is not only based on reputational concerns from private actors, but derived from a broader, more politically charged global movement.
In 2000, the Millennium Summit took place in New York City at the United Nations, and was the largest gathering of world leaders at that time. The purpose of the Summit was to determine the ongoing role of the UN and propose new goals for creating a better world.
At the bequest of the UN Secretary-General at that time, Kofi Annan, a study was commissioned to make the business case for corporate commitments to social initiatives, and in 2006 the UN called upon countries to become signatories to its Principles for Responsible Investment (PRI). For those who signed on to the PRI, the standards proposed required firms and capital markets to take part and do more for the global good.
After 2015, the MDGs morphed into the Sustainable Development Goals (SDGs), and the PRI prompted the creation of ESG frameworks. Both the Sustainability Accounting Standards Board (SASB) and the World Economic Forum (WEF) promoted efforts for instituting “a globally accepted system for corporate disclosure” to track the progress of the SDGs and pressured financial firms to implement ESG metrics as proof for doing their part.
The adoption of ESG standards, however, is truly problematic given that value and virtue are difficult to measure and there will always be tradeoffs – whether Freeman likes it or not.
A troublesome matter for businesses serving societal goals rather than marketplace needs is the complexity of catering to all stakeholders at once, and the subjectivity of what is meant as being ‘good’ or when ‘good’ does or doesn’t apply.
For instance, prior to the pandemic, regulators aimed to limit the use of single-use plastics, but such stipulations were suspended in response to COVID-19 safety concerns. Recycling centers shut down and plastic production ramped up. This was what was needed, and therefore good for society.
Businesses shouldn’t need a stamp of approval from a certifying agency, especially since sales will signal when something of worth is being offered, and if profits decline organizations must work to understand why. Nevertheless, attaining the B Lab logo or being a partner in the conscious capitalism campaign has a strong appeal for those looking to gain social capital and appease industry elites and political pundits – and these initiatives are not only gaining traction, they are joining forces.
The Rebranding of Business and Centralized Control
Just recently, the Imperative 21 Network was launched to “RESET” our economic system, and both the B Team and Conscious Capitalism are listed as two of the primary stewards for this initiative.
The Network represents “more than 70,000 businesses, 20 million employees, $6.6 trillion in revenue, and $15 trillion in assets under management” and the goal is “to shift the cultural narrative about the role of business and finance in society”. And the shift is certainly underway given that in 2019, the Business Roundtable, made up of a group of 180 CEO’s of America’s largest companies, declared that business must aim to improve the status of all stakeholders and play a larger role in society.
With all this in mind, it is no wonder ESG took a stronghold in the investment community, and it is unnerving to see how easily the business world succumbed to power players.
But what is more worrisome is the fact that certifying agencies and assessment measures inevitably embolden regulators. Take for example the organic agricultural sect, whereas the certifying bodies were initially self-regulated and self-certified, having been established by the farmers themselves. However, as sales increased for organically labeled foods, so too did the number of certification bodies involved. The emergence of various organic labeling schemes confused what each label stood for and, over time, it became necessary to address the processes of certification and establish a more standardized and regulated system.
And the same will likely be true for ESG. Right now, there are a diversity of ESG frameworks with fees ranging from thousands of dollars to several million, and credibility concerns are on the rise and generating interest from monitoring agencies.
Given that ESG was formulated within the UN system to further the UN’s SDGs and hold PRI signatories accountable, it seems rather clear which ESG framework will win out in the end – the Global Reporting Initiative (GRI). The GRI is partnered with the UN and was founded with assistance from the UN Environment Programme and, coincidentally, it is currently the most widely used framework (implemented by 73% of the world’s top 250 firms).
Therefore, it seems likely that any standardized framework will be based on the UN’s postulates when all is said and done, and this will have all transpired in front of our eyes and by use of our own pocketbooks.
Courtesy of the American Institute for Economic Research (Full version of the article available on the website)
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