ESG - Keeping it real

Within the world of physics, the “observer effect” states that simply observing a situation is sufficient to alter it. In other words, holding something up to scrutiny will inevitably stimulate change.

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The onslaught of COVID-19 pandemic early 2020, made critics speculate that climate agendas and other ESG concerns might be put on the back burner. To their dismay, the opposite occurred.

Focus on climate action has intensified, and social issues moved to the forefront with global outcries against racial injustice, a spotlight on worker safety and the experience of the disproportionate impact of the pandemic on minorities and women.

A range of ESG issues are being advanced whether it is through new regulations, enhanced legislation, heightened investor disclosure requirements, customer demands and performance standards, ESG ratings agencies and peer comparisons, proxy advisors’ guidelines, increasing stakeholder activism and litigation, and political agendas.

True ESG integration is now a reality and the era of sustainability is reaching into every jurisdiction, every corporation, every asset class and every portfolio

ESG purpose is simple: to measure the impact of companies on our society and planet. There are companies that have done it right, CVS Pharmacy, which stopped selling tobacco; Royal Dutch Shell, which dropped out of the U.S. oil lobby

Each of the ESG pillars has an important bearing on the capacity of a firm to generate shared and sustainable value. Performance in one pillar is highly interdependent with that in the others.

ESG measures such as reducing waste, strengthening relationships with external stakeholders, and improving risk management and compliance are good business hygiene.

As John Coates, acting director for the Division of Corporation Finance at the Securities and Exchange Commission (SEC) succinctly states in his March 11th 2021 statement, many ESG-related issues are similar to risks that evolved from "invisible to visible to extremely clear, and clearly financial," noting how asbestos hazards eventually became an essential topic for company disclosure.

The ESG movement has grown, but so has anxiety about greenwashing. Sadly, a genuine movement meant to benefit the public good risks becoming a buzzword assimilated to keep maximizing short-term profits

When corporations resort to offering ingenuine pledges or overpromise transformation, they undermine the authentic sustainable good work being done by others as well as accentuate their reputational risks. Majority of the stakeholders struggle to differentiate bad-faith claims from substantive actions.

Symbolic programs and philanthropic side projects erode the public’s trust and invite counterattack against such inconsequential efforts.

While some will blame this shallow corporate behavior on lack of proper top-down approach to sustainability and good governance, others tend to find excuses behind absence of ESG bottom-up culture.

Ultimately, ESG agenda belongs to the Board as part of their fiduciary responsibility and duty. Are the Boards asking the right questions ? Do they know how to ? Are they willing to learn and adapt to the new normal ?

The real obstacle to ESG adoption by companies is the way bonuses are based on short-term financial performance and absence of ESG linked KPI’s. The day it affects an individual’s bottom-line – the naysayers will wake up and align with the believers and only then the systematic action towards ESG integration will begin.

The “green wave” of the society is making businesses greener even though this is rarely their intention. At the end of the day, whether it’s from a self-designed intention or by the force of stakeholder’s pressure, it is the impact that counts.

Keep observing, change is inevitable.