How ESG can help businesses do the right thing with Alison Taylor
Alison Taylor is Clinical Professor at NYU Stern School of Business and Executive Director at Ethical Systems.
ESG and sustainability are not the same thing
To put it simply, ESG exists because investors and citizens, customers, suppliers and employees all want business to be more responsible about its impact. And yet so much time is actually spent debating ESG rather than discussing what ESG actually needs to evolve.
So, what evidence is there that doing the right thing will actually make or save a company money? Does ESG really matter for financial performance?
Unfortunately, says Alison, there are many thousands of studies exploring this very question, and the evidence is mixed. Which isn’t surprising, given that ESG metrics are still in their infancy.
“And there is no particular reason to think that ESG would correlate with a high financial performance, because it's an enormous range of issues. And it is up to a company to be strategic about the issues that it wants to focus on.”
However, continues Alison, there's certainly a relationship between negative impacts a corporation might have on society and financial results, but we shouldn’t kid ourselves that that plays out in a linear way. Take Exxon Mobil, for example, this is a company which was under a lot of pressure on climate change a few years ago, but has just had its highest results ever.
“ESG is an investor's attempt to quantify sustainability, but it is sustainability that the public and customers and young employees particularly care about. ESG is investors' attempts to make more money from these approaches. ESG and sustainability are not the same thing.”
Is ESG a moral issue?
Sustainability, says Alison, was coined in the late 1980s, arising from concerns around environmental disasters, exploitation of cheap workers in Asia, and rising evidence of the impacts of climate change, the negative human rights and mental health impacts of social media.
“For all the people arguing that ESG has no ethical component, the range of things companies can do are all quote unquote, good things. The debate is how to select among those, quote unquote, good things.”
The problem is, the ESG field argues that you should select on the basis of quantifiable financial performance, says Alison. You don't just do the right thing, you only do the right thing, if you can prove it's going to make more money.
The sustainability field, on the other hand, suggests that you should focus on the impact of business because that is the root cause of concern. And people who argue against that say that it is ridiculous for a business to do something just for good reasons, if it isn't profitable.
“At the end of the day, the debate comes down to ethical issues and impact issues, and how we as a society are expecting business to behave so that the question is what exactly we do about these issues. But to say they have no ethical component, I think is a little naive and a little simplistic.”
Putting the G in ESG
In Europe, much of the discussion focuses on the E in ESG, says Alison, in the US it is more on the S. Very rarely, however is there much debate and discussions around the G. Which is where problems arise.
“I don't think anyone actually agrees on what the G of ESG is. Many people treat it as a question of corporate governance. It’s about measuring the quality of mainstream corporate governance, how shareholders are engaging with companies, how well run the company is. It's very often thought of in those very narrow terms.”
Part of the problem, she continues, is we're having a very mixed up conversation, because we're not really clear what we're actually talking about. And this is made even more complicated because of the rise of employee activism, consumer activism, and shareholder activism over these issues.
So, what should we talk about when we talk about G?
“We need to debate how governance works and how companies think about stakeholder interests in how they make decisions. Even a notion like stakeholder capitalism still envisages the company as a fake corporate person, and other stakeholders as being a threat to the value creation of that corporate person.”
We need to start thinking of corporations as social systems that interact with other political, economic, social and environmental systems, says Alison, and we need to think about risk and return on the role of business in a completely different way that stakeholder capitalism does not fully enable.
How to do governance - best practice advice
ESG metrics are not the same thing as a credible sustainability strategy, argues Alison. You need to be mindful about trying to help companies drive strategic change, as opposed to ticking the box on 30 or 40 ESG metrics.
That’s not to say that corporations shouldn’t be ambitious and try to tackle 30 or 40 ESG issues, says Alison, it’s just most would be much better off if they focused on one to three issues that they might be able to actually achieve strategic transformation on.
“We are failing in general to differentiate between strategic risks, innovation opportunities, and ethical imperatives, and therefore we end up with poorly designed incentives, poorly designed goals, and a lot of companies out there saying that they're doing wonderful things on issues like net zero, and the world just keeps getting hotter.”
The future for ESG
ESG isn’t a trend or a fad, says Alison, it’s not going to go away. People are very aware that we, as a race, are having a negative impact on the world, and we understand that things are going to get worse if we ignore them.
So the future for ESG, says Alison, will likely include more of a focus around impact, corporate political responsibility, and issues such as responsible tax, as well as doing something meaningful about anti corruption.
“I'm absolutely certain that we will continue to see all these conversations advance. And I base that on what I see in the classroom, every day. I teach MBAs and I teach undergrads and it is very, very clear that they think very differently about their careers and about the role of business.”
The problem of ethics and morals with ESG
“Everybody thinks that their approach to ethics is the quote unquote, right one, but ideologies, religions, upbringing and culture, there are varying perspectives on this. It is genuinely quite hard to know what it is for a business to be ethical.”
Alison is seeing a shift in employees selecting a company to work at based on the moral fabric of the organization. Something that is becoming more apparent with consumers too, where previously it hasn’t mattered what kind of values or ethics or morals a company, now that’s changing, now that’s driving their buying behavior.
“I don't think we necessarily need more inspirational leaders at the top. I think what we need is more consultation with the collective. We need to listen to the wisdom of the collective. We need fewer big egos showing up at Davos claiming to save the world, and more listening to the rank and file of employees about what's important.”
Choose a career based on where you can have impact
When choosing your future career, advises Alison, think about what you enjoy and where you can have the most impact. Don’t treat your career as an outlet for all your ambitions and frustrations. Engage with the political process, suggests Alison, engage with wider society. Don’t expect your job to provide all the emotional, spiritual and intellectual fulfillment that you desire.
“Try many different things and figure out what you enjoy and how you can contribute and not feel pressured to go a certain path. And follow that all the way through.”