Beyond ESG

Thanks to a share on WA by a friend, i saw this aricle.

With the help of ChatGPT, and some of my past research into the issues related to environmental issues, I had some bias towards building a way forward, was able leverage chatgpt to generate this article.

Disclaimer: while I agree with the general slant/theme of the article(i framed the theme, I don't agree with all the details that AI suggested or generated.

### Beyond "ESG Theatre": Building a Framework for Sustainable Corporate Strategy

The evolution of Environmental, Social, and Governance (ESG) frameworks was meant to encourage businesses to adopt more responsible and sustainable practices. However, over time, ESG became a broad and ambiguous concept, criticized for becoming more about optics than impact. As Chatterji and Toffel suggest in their article "It’s Time to Unbundle ESG," the very breadth of ESG turned it into a target rather than a meaningful measure of corporate responsibility, leading to what has now been derisively called "ESG theatre." Companies checked boxes, touted their commitments to environmental and social causes, but often failed to deliver real, measurable progress. As we consider what could replace ESG, we must learn from its shortcomings. The next iteration of corporate sustainability frameworks must avoid becoming another target, focusing instead on tangible results while addressing the inherent trade-off between short-term profits and long-term environmental sustainability.

### The Inherent Trade-off: Short-Term Profits vs. Long-Term Sustainability

A central tension within ESG and corporate responsibility initiatives is the trade-off between short-term profitability and long-term sustainability. Businesses are often driven by the pressure to deliver quarter-to-quarter profits to shareholders, and this short-term focus can be at odds with sustainability goals that require long-term investments. For example, transitioning to renewable energy, reducing carbon emissions, and rethinking supply chains to be more sustainable may have significant upfront costs that can erode short-term profitability. However, these initiatives are essential for ensuring the long-term resilience of both the business and the environment it operates within.

Balancing these conflicting demands requires a fundamental shift in corporate decision-making. Instead of focusing solely on maximizing immediate returns, companies must weigh the long-term environmental impact of their actions alongside short-term financial goals. This shift in priorities is not about sacrificing profits for the sake of the environment but about recognizing that long-term business continuity depends on sustainability. Climate change, resource depletion, and regulatory changes will increasingly affect business operations, and companies that fail to adapt may find themselves facing existential risks in the future.

### Evolving Decision-Making Systems for a Sustainable Future

To navigate the tension between short-term profitability and long-term sustainability, corporate decision-making systems need to evolve in several key ways:

1. Balancing Short-Term Gains with Long-Term Goals: Corporate leaders need to develop decision-making frameworks that integrate long-term environmental and business sustainability metrics alongside traditional financial ones. Companies can no longer afford to base their strategies solely on quarterly earnings reports while ignoring the long-term risks associated with environmental degradation, climate change, or social instability. This balance will involve setting measurable sustainability goals—such as reducing carbon footprints, improving resource efficiency, and fostering equitable social policies—while still delivering financial returns that satisfy shareholders.

2. Aligning Incentives with Long-Term Success: One effective way to manage this balance is to tie executive compensation and corporate performance metrics to long-term sustainability outcomes rather than just short-term financial gains. By making sustainability a core part of performance evaluation, companies can incentivize leadership to make decisions that benefit both the business and the environment in the long run. This ensures that sustainability goals are not treated as secondary concerns but as integral to the company’s overall success.

3. Lobbying for Smart Regulations: Another critical element in balancing short-term profits with long-term sustainability is the role of government regulation. Too often, businesses use their lobbying power to push for regulations that enable quick financial returns, even at the expense of long-term sustainability. Instead, companies should advocate for policies that encourage responsible, sustainable business practices, such as carbon taxes, renewable energy incentives, or stricter environmental impact regulations. Supporting smart regulation not only levels the playing field but also helps create a predictable business environment where long-term investments in sustainability are rewarded, not penalized.

For example, a carbon pricing mechanism, such as a carbon tax or cap-and-trade system, can create the economic incentives needed for businesses to transition toward cleaner energy and reduce emissions. This would align corporate financial incentives with environmental goals, ensuring that companies invest in sustainable technologies and practices that will support their long-term viability while helping to mitigate climate change.

### Guarding Against "ESG Theatre" in Future Frameworks

The downfall of ESG as a meaningful measure of corporate responsibility can largely be attributed to its transformation into "ESG theatre." Companies began to use ESG as a branding tool rather than a framework for genuine progress, making superficial commitments without following through on meaningful change. The term itself became so broad that it lost its significance, leading to confusion over what ESG truly measures and how to hold companies accountable.

For the next framework to succeed, it must avoid the pitfalls that turned ESG into a target rather than a measure. This means focusing on concrete, measurable outcomes rather than vague or aspirational commitments. A good starting point, as Chatterji and Toffel suggest, is unbundling ESG into its constituent parts—environmental, social, and governance—so that each can be addressed with the specificity and rigor it deserves. This would prevent companies from hiding behind the broad umbrella of ESG and instead force them to make clear commitments to measurable outcomes in each area.

Moreover, the new framework must prioritize transparency and accountability. Rather than allowing companies to set their own benchmarks or report on their own progress, third-party assessments and standardized metrics should be employed to ensure that progress is real and verifiable. Companies should not be able to move the goalposts or shift definitions to avoid accountability, as has often been the case with ESG. For example, environmental performance metrics such as carbon emissions, water use, or biodiversity impact should be clearly defined and tracked over time, with public reporting that allows stakeholders to hold companies accountable for their progress (or lack thereof).

### Conclusion: A Framework for the Future

As the shortcomings of ESG become more apparent, it is clear that the next iteration of corporate responsibility must be more focused, accountable, and measurable. The inherent trade-offs between short-term profits and long-term sustainability can no longer be ignored, and businesses must evolve their decision-making processes to ensure that they are balancing both ends of the spectrum. This will require leadership commitment to long-term goals, a willingness to embrace smart regulation that encourages sustainable practices, and a move away from "ESG theatre" toward real, measurable progress.

To ensure that the next framework avoids the fate of ESG, it must remain a measure, not a target. By prioritizing long-term sustainability over short-term gains and fostering accountability through transparent, third-party assessments, the new framework can provide a roadmap for companies to navigate the complex intersection of business and society in the coming decades. This approach offers a promising foundation for ensuring that businesses can remain profitable while also contributing to the long-term health of the planet and society.