By: Matthew Gardner, Co-Founder and Managing Partner at Sustainserv
Conservative dogma has long held that the government should not meddle in the business of private companies. But for many months now a crusade to stop investors and companies from considering ESG (Environmental, Social, Governance) factors in their decision-making has taken off in various political arenas.
Investors and corporate executives have long known that some ESG-related issues may represent a material risk to a company’s performance or, alternatively, may represent a tangible opportunity to be explored. But this is being derided as a form of “woke capitalism” and is the subject of congressional hearings and unhinged rants in media outlets. Such ideas, coming from people and groups who tout the benefits of limited government and free markets, are at odds with how the free market works as well as the fundamentals of capitalism.
We’ve been here before….
ESG is simply the latest bête noire of the same crowd who uses “sustainability” as a pejorative and sees things like energy independence via renewable energy as politically motivated. Opponents attack ESG as if it is some newfangled investment strategy pushed by tree-hugging do-gooders who hate capitalism. But ESG has been a widely-accepted strategy for more than two decades, one that has been adopted by major corporations around the world.
Simply stated, considering ESG in corporate management or investment strategies is not about being “woke” or prioritizing “feel good” efforts over corporate performance. When properly applied, it is a lens through which to improve long-term performance and evaluate the risks and opportunities that environmental, social, and governance factors pose for a company’s value.
Critics erroneously charge that ESG investing prioritizes addressing climate change or diversity over returns and that corporations don’t – and shouldn’t have – any responsibilities beyond making money. However, that viewpoint neglects to consider that while corporations’ ultimate responsibility is to make money, they’re making that money in the context of and within the ecosystem in which they operate. And that in order for them to make money, that ecosystem needs to be healthy. In the case of diversity initiatives, employees need to be engaged and motivated by their workplace.
Addressing the climate crisis is good for the bottom line
Businesses already have a strong self-interest in the climate crisis because its effects can be destructive to the economy. Floods, fires, and extreme weather events can destabilize their bottom lines, disrupt supply chains, affect employee health, and wipe out the infrastructure necessary to run a successful company. Think about the difficulty of running a resort on Sanibel Island after a Cat 5 hurricane or keeping a small manufacturing facility afloat in a drought-stricken area of California that is consistently ravaged by wildfires.
All of these reasons and more expose the reality: Discrediting ESG is not “anti-woke” – it’s bad business. Rather there is empirical evidence that sustainability initiatives at corporations are correlated with better financial performance, according to a review of more than 1,000 studies on the subject by researchers at New York University’s Stern Center for Sustainable Business.
Further, investment managers have a fiduciary duty to deliver the best returns possible to their clients while at the same time, investing their clients’ resources according to the wishes of the clients. Entry-level courses in investing say that diversifying risk is a basic strategy, so prohibiting investment managers from considering ESG funds (or investing in companies that consider risks and opportunities represented by ESG issues) is antithetical to their fiduciary duty. Those who decry this practice as “woke” presume that private companies and Wall Street no longer care about turning a profit. This is not only unlikely but downright laughable.
Capturing and reporting accurate data is key
To cut through all the noise and disinformation out there, however, companies must be able to articulate how their ESG programs increase their ability to create value. If being a diverse organization improves performance, they should document and share the information and data. If being a good climate actor increases business, companies must avoid “greenwashing” and communicate accurate data to underscore the fact that it is not only reducing the company’s risk for climate risks such as a possible carbon tax but also protecting facilities from physical risk down the line. If an organization’s focus is on the health and safety of employees, demonstrate the improvements in the company’s ability to appeal, attract, and retain employees.
Successful businesses and the investment community both understand that there are levers that they can and should be pulling to optimize their ability to return value – including financial value back to their stakeholders. When businesses can show how integrating ESG factors has made them more profitable and/or demonstrate how ESG investments provide a sustainable path to long-term returns – they can mute the absurd chirping from the anti-woke crowd.
After all, as more companies gravitate toward ESG, it won’t be because Greta Thunberg told them to, it’ll be because their investors are demanding it. That’s not “woke capitalism,” that’s capitalism 101.
About the author:
Matthew Gardner is Co-Founder and Managing Partner at Sustainserv, and he teaches sustainability at the Harvard University Extension School