“The old is dying and the new is struggling to be born; in this interregnum a great variety of morbid symptoms appear. –Antonio Gramsci
In a recent feature article on the future of ESG, The Economist magazine looked closely at the current morbid symptoms. He then proceeded to make the wrong diagnosis and, unsurprisingly, prescribe the wrong treatment.
“[ESG] is an unholy mess… the various scoring systems have gaping inconsistencies and are easily played.
These few sentences from the leader are irrefutable. But these are only symptoms and not the disease.
ESG – an acronym for environment, social and governance – is part of an alphabetical soup of descriptors that all point in the same direction. ESG, CSR, SDGs, sustainability, carbon emissions, purpose-driven companies, stakeholder capitalism, “taking a stand” on culture war issues…and the rest, all go part of hugely confusing and increasingly frustrating exhortations to companies to “do better”. .” It’s like everyone throwing mud on the corporate wall hoping that some part will stick – and that would be rating agencies, consultancies or any other company hoping capitalize, they would be the ones to improve their own business out of this chaos. All of this is largely well intentioned.
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Unsurprisingly, corporate executives are beginning to throw up their arms in mounting exasperation. How are we supposed to deal with all of this and continue to run our business?
The natural reaction of any human being or organization when overwhelmed is to try to cheat the system and/or postpone and delay. Ask for “evidence” and perfect and uniform quantification so that we can continue to operate as if nothing has happened during all that is sought. And if some of them can’t be precisely quantified, then we can’t expect to deal with them.
Hence the proliferation of “green laundering”, very flawed grading systems still in their infancy, many of which generate perverse incentives that make matters worse, and many other chaotic activities that create the perception of progress while respecting the status quo for as long as possible.
These are the symptoms.
The net result of this confusion is that “ESG” is degraded into a measurement and compliance system and subject to a checkbox approach.
To arrive at the proper diagnosis, we need to go back to first principles.
The ESG is just one manifestation of the fact that the socio-cultural and political climate has changed dramatically over the past two decades. The nature and tone of political debate have become more heated. Political positions have become more polarized. Previous certainties are gone – our views on globalization; the primacy of neo-liberal laissez-faire ideology; the supposed efficiency of the trickle-down economy; our tolerance for externalities generated by commercial activity; acceptance of the idea that the role of business is exclusively to maximize shareholder value; the perils of financialization; and many other political issues too numerous to list. All of these previously agreed certainties are now contested.
The fundamental question for business leaders is therefore simple: how do I evolve and adapt my business practices to succeed in this highly polarized political environment and the explosion of hitherto held “truths”?
None of this can be reduced to ESG metrics or turned into a tickbox exercise delegated to a newly created department. Metrics and scoring systems can be a helpful aid. Or, as currently seems to be the case, they can add even more confusion. But, in any case, they are a great actor and not the central character of this drama – and they should be treated as such.
Given that he drew the misdiagnosis from visible symptoms, it’s perhaps unsurprising that The Economist article offers a bizarre prescription: forget everything else and focus only on carbon emissions.
The proposed prescription has merit. It highlights the peculiar nature of climate change – potentially having a huge impact on planetary stability and the lives of our children and grandchildren, and, unlike other things, is likely irreversible. It must be a high priority.
But that doesn’t mean companies can or should just focus on a measurable issue, carbon emissions, and ignore everything else.
Such an approach ignores the fact that our societies are complex adaptive systems where everything is interconnected. Choosing one element of the system while ignoring everything else it interacts with is a sure recipe for failure, as any complexity scientist will tell you. Reducing emissions to fight climate change also depends on a set of political and societal factors that will enable us to achieve this. Cutting the ‘E’ in drifting ESG as the magazine’s graphic cover suggests – and expecting it to work – brings us back to the now obsolete thinking that we can isolate individual problems and address them without understanding the interconnections. .
Even if companies tried to ignore everything else but carbon emissions, the world wouldn’t allow them to. They will constantly be asked about the working conditions in their supply chains, whether it is acceptable to continue doing business in Russia or how they manage their business in China, whether they have employment policies discriminatory, among a myriad of other issues.
Imagine a CEO rising up and responding to these challenges with, “I’m not interested in all of this. I focus on our carbon emissions.
The idea of reducing management’s responsibilities to a clear and measurable outcome and ignoring everything else is as seductive in its seductive simplicity as was the concept of maximizing financial value for shareholders. Simple, clear, comfortable and false.
How beautiful if we could all live our lives by following one easily measurable outcome rather than living in the real world of conflicting goals and difficult trade-offs. But, as we all know, putting on blinders and trying to protect yourself from messy realities is not often a path to success.
The reality is that ESG is not about measurement and compliance. This challenges the very nature of what we mean by business. What societies and the policies in which they are embedded come to expect of large, medium and small businesses. It is a window on the future of the company. As always, those who adapt best and fastest will outrank their rivals.
But how to adapt? This may be a subject for the next article.
Joe Zammit-Lucia is the author of “The New Political Capitalism: How Business and Corporations Can Thrive in a Deeply Politicized World”. An entrepreneur with a previous career in multinational corporations, he is one of the founders of RADIX, a non-public policy aligned think tank.