Which almost all exclusively refer to the climate movement. These aren\u2019t necessarily wrong. Many aspects of ESG do overlap with transition or sustainability strategy. It\u2019s often said that ESG is really \u201cbig E, little S and G,\u201d which is to say that, out of the three letters of ESG, \u201cE,\u201d or environmental, is often seen and received as the most important.<\/p>\n\n\n\n
Using ESG almost synonymously with energy transition or sustainability does one of two things though. 1) It does a disservice to the other aspects of ESG that are not climate-focused and 2) It can actually be hurtful to growth-oriented sustainability initiatives.<\/strong><\/p>\n\n\n\n #1 is a little more obvious than #2. When the emphasis for ESG is placed so heavily on climate, and in particular emissions, the company can under-recognize efforts that have gone into other initiatives. Things like DEI, responsible labor practices, and business ethics that can get \u201cunderfunded\u201d internally with a warped definition of ESG, which can potentially minimize the influence of the company on human relationships and social systems at times where it can be immediately impactful. ESG has to be recognized as a broad umbrella.<\/p>\n\n\n\n (SASB does this well. They\u2019ve identified 26 areas<\/a> that fall under ESG, of which 15 have no direct relation to the \u201cE\u201d in ESG.)<\/p>\n\n\n\n #2 is what I\u2019ve come to realize over time \u2013 and it\u2019s something that I don\u2019t think is immediately obvious.<\/p>\n\n\n\n ESG\u2019s intended purpose is to identify and address the environmental, social, governance issues that matter to a company. The keyword here is matter<\/em>. In practice today, matter<\/em> means what gets investors to put more money forward. Matter<\/em> is what\u2019s relevant to financial performance. Matter<\/em> is \u201cwhat does the company do that is different from other companies and raises its equity valuation.\u201d<\/p>\n\n\n\n In other words, ESG is fundamentally a benchmarking framework. It\u2019s used in practice to identify companies that stand out relative to other companies. And it\u2019s used in this way by investors<\/em> in particular. Which is why the questions that get asked over and over again in ESG circles are \u201cwhy does ESG matter to financial performance?\u201d \u201cHow is this going to make me more money?\u201d<\/p>\n\n\n\n (To put SASB in the spotlight again, this is exactly why they have materiality calculators<\/a> to determine which of the 26 areas of ESG actually matter for enterprise value across different industries.)<\/p>\n\n\n\n This can undermine true sustainability in leading a company to always look at their neighbor for guidance on what to do and to only focus on things that their investors consider linked to financial return, a mindset that tends to lead companies to take the most conservative path towards sustainability.<\/p>\n\n\n\n A good analogy is in school. The goal of school is to learn (or learn how to learn), but when a student focuses too much on getting good grades (\u201cESG score\u201d) to get a good job or go to a good college (\u201cfinancial return\u201d) vs. actually learning (\u201cbeing sustainable\u201d), the incentive might be for the student to take easier classes or to just do enough to outcompete her fellow students. A parent (the \u201cinvestor\u201d) might say \u201cwhy in the world are you taking that class? How is that going to get you a job?\u201d Which is exactly the kind of advice that, while practical, gets in the way of true scholarship. And leads to kids not taking enough academic risks for learning\u2019s sake. (And leads those same kids to take investment banking jobs down the line \ud83d\ude0a)<\/p>\n\n\n\n Another way of putting it is that thinking that ESG is the same as sustainability disincentivizes companies to be creative, aggressive, and risk-taking in putting forward new sustainability growth initiatives. If all you care about is the measurement, you\u2019re more likely to stick to what\u2019s being measured.<\/p>\n\n\n\n Don\u2019t get me wrong\u2026ESG is still very important. It (in theory) establishes a fair and objective baseline across companies and industries. It allows the laggards to recognize that they are laggards and take the first step to catching up. It\u2019s a requirement for being a good company. And establishing ESG standards and practices is critically important for catalyzing industry-wide movements forward in sustainability and governance.<\/p>\n\n\n\n But I think it\u2019s wrong to mistake a company\u2019s ESG strategy for sustainability strategy. Every company needs both. ESG can measure a company\u2019s position vs. peers and allow a company to calibrate itself to accept industry best practices. Sustainability strategy will probably overlap in many ways but should always take things a step forward in ways that ESG cannot as a benchmarking tool. Every company has the opportunity to create differentiated, creative sustainability strategy in areas that are not captured by ESG.<\/p>\n\n\n\n In short, get good grades, but don\u2019t forget to learn as well.<\/p>\n\n\n\n An example of what I mean using a fictional lemonade company: <\/p>\n\n\n\n ESG is often brought up in the same context as sustainability (and climate and energy transition). In many cases, it\u2019s use interchangeably with sustainability to refer to an organization's desire to \u201cgo green.\u201d Take for example these recent articles about ESG: Asset managers divided by HSBC executive\u2019s climate criticism Maybe There\u2019s No Such Thing as […]<\/p>\n","protected":false},"author":1,"featured_media":299,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"_links":{"self":[{"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/posts\/296"}],"collection":[{"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/comments?post=296"}],"version-history":[{"count":5,"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/posts\/296\/revisions"}],"predecessor-version":[{"id":305,"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/posts\/296\/revisions\/305"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/media\/299"}],"wp:attachment":[{"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/media?parent=296"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/categories?post=296"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/etechmonkey.com\/index.php\/wp-json\/wp\/v2\/tags?post=296"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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