The ESG acronym has become increasingly pervasive in corporate communication. “E” is the first letter of the word “environment”, suggesting the importance of environmental protection in conducting economic activities. “S” is the first letter of the word “social” and stresses the fact that businesses must attach due importance to the people and their relations with them: data protection, diversity, human rights, labor standards, community engagement and so on. Eventually, “G” is the first letter in “governance”, which concerns the structure of the boards of directors, business ethics, financing of the political environment or remuneration.
All these areas are highly important and strongly promoted in the business environment. So strong that ESG seems to be on the verge of becoming a new “religion” of the business environment. And with it comes the risk of many false prophets emerging.
At a first glance, the high number of articles, positions, commitments, conferences, organizational changes, announced investments suggests profound changes in the way businesses operate. Moreover, it suggests their willingness to prioritize the above values to the detriment of purely financial data, as they understand the long-term benefits of such an approach.
But how much of it is honesty and how much of it is hypocrisy in this world of ESG strategies? Where does the commitment end and where does the branding exercise begin?
I think the first major test for the ESG philosophy was the annexation of Crimea by Russia. It is worth noting that the presence in an invading country that threatens and uses military force has never been ranked by the ESG masterminds in any of the three values they promote. Apparently, the concern for environment, social and governance did not include the illegal annexation of territories and the terrorizing of inhabitants. Therefore, the companies saw no reason for not continuing their business in an aggressor state, while, of course, keeping with the environment, gender equality and ethical governance (?) principles.
The “benefits” of looking the other way became obvious later on, with the breaking of the war on Ukraine. But, apparently, the shelling of the cities and the killing of innocent civilians did not fall under the E, S or G either, if we recall the substantial political pressure that many companies had to bear before deciding to unwind their Russian businesses. A New York Times article had recently taken stock of the companies still working on their divesting, while otherwise governed by the ESG principles.
But maybe some of you will think it is unfair of me to choose such an extreme scenario for testing the honesty in ESG approaches. The bad news is that even if we lower the standards, things won’t look any better. Financial Times noted in this context the emergence of a new trend, called “the green hushing”. Exposed and assessed increasingly on ESG topics, an even higher number of companies choose to no longer publish details about their environmental protection targets so as not to be accused of tampering with the data and the public opinion or of missing the targets.
Certainly, “green hushing” will not be an option for listed companies, given the transparency requirements that a listing imposes, but also the fact that the asset management industry is increasingly assuming an ESG activism, meant to put pressure on reforming the companies in which they invest and play as significant shareholders.
The problem is that the asset management sector promoting ESG in other companies fails to do the same in its own backyard. Currently, according to FT, only 12% of fund managers are women, representing a “significant” increase of 1.7 percentage points compared to 2016 when Alpha Female conducted its first survey. It is also worth noting that this quasi-stagnation has been achieved despite an increase in the CFA female graduates from 28% in 2012 to 40%, which suggests barriers in the recruitment and promotion of women.
But this may also take a while, as it is a long process that cannot bring results overnight. So let us see what might actually happen overnight. Literally!
Those of you who will arrive in London will notice how, at 11 pm, hundreds of floors of office buildings are empty, but lit up as if in daylight. All those companies hosted there have extraordinary ESG plans for public consumption, but failed to find a timer that would turn off the lights as the night falls. It was neither about strategies, nor about committees or commissions, nor about mega-investments. A smart switch would have done the job.
However, it would be unfair to suggest that this only happens in London. Recently, the French Government, in the context of the energy saving imposed by the adverse market conditions, banned the lighting of offices during the night. Apparently, the companies were concerned with much more sophisticated ESG strategies…
Have a nice weekend!
