As a human structure, what does a corporation owe the human beings it comprises and serves? What does it owe the other human structures (economy, community, family) that it depends upon, and the values (health, well-being, prosperity) that underpin them?
ESG – Environment, Social, Governance—is an elegant and beautiful summation of this bigger idea. However, its meteoritic rise in influence over the past year has triggered as much reaction as reflection. Many corporate leaders are struggling to define and design meaningful and coherent strategies.
“I always thought we were doing a pretty good job in terms of community,” one CEO recently confided, “but now we’re getting questions from shareholders that we’ve never gotten before. What is our position on diversity? What is our environmental plan?”
Another senior leader described feeling constantly caught off-guard by unprecedented events—such as the Capitol riot—that forced corporate actors to re-examine routine practices such as political contributions. “Is this going to stick?” he wanted to know. “Is this new focus on political contributions about this one insane moment, or something we have to justify and explain from now on?”
ESG, at its root, is about long-term value and sustainability. For investors, it is a lens through which they can examine and understand not only risk—does this company have what it takes to remain successful in the unfolding reality of the world?—but also opportunity: will this company not only rise to society’s challenges but help solve them in a sustainably profitable way?
The challenge for corporate leaders is being asked to prove something for which there is no single standard of proof. There is no agreed-upon, holistic ESG framework. Rather, companies are being asked to demonstrate their competency in relation to a series of (seemingly) disparate issues and reporting structures—many of which are competing, and most of which remain voluntary (and even that is jurisdiction dependent). As Tim Mohin, former CEO of the Global Reporting Initiative, recently wrote: “Sustainability, unlike financial matters, includes a vast array of disparate issues that are not easily compared. An example is reporting on gender diversity vs. greenhouse gas emissions: Both are well within the scope of sustainability reporting, but obviously can be neither compared nor offset.” This is not likely to resolve quickly or coherently.
It’s easy to understand why so many leaders are in reactive mode. It feels like an Eve-eating-the-apple moment: comfortable and secure in who we are until the light suddenly shifts, and we see that we are naked. The unprecedented disruptions of 2020 — including the global pandemic, the racial justice movement after the George Floyd murder, and the increasing urgency of climate action — have lit up so many dark places, so quickly. With risks to businesses rising, the pressure to respond is overwhelming. That pressure is both driven and compounded by increasing demands from both investors and regulators.
The urge to cover up quickly, to patch up all our revealing holes, piece by piece, is natural. But will this approach serve corporations (and investors and society) in the long run? We believe there’s a better path – with less risk, and more potential business opportunity.
As Blackrock’s Larry Fink wrote in his latest CEO letter, “The more your company can show its purpose in delivering value…the better able you will be able to compete and deliver long-term, durable profits.” He emphasized that it is “misguided to draw stark lines” between E, S, and G – as if these were fundamentally different questions. “What matters is less the category we place these questions in, but the information we have to understand them and how they interact with each other.”
ESG questions are, by definition, leadership questions. They are complex, necessary, and ultimately, the driving force that will define corporate success for generations to come.
In future posts, we will examine how leaders across sectors are facing and rising to the call. We invite you to join us on this journey—as we learn and grow together.