Make ESG mean more than ‘everyone’s spouting green‘

Hail Amazon, US champion of ESG! (Currently defending lawsuits about shocking wages and working conditions.) Hail Boohoo, UK champion of ESG! (Lost a third of its share price overnight due to the revelation that workers in its supply chain in Leicester were being paid far less than the minimum wage.)

And I bet there’s a whole lot more companies out there paying lip service to environment, social and governance (ESG) issues by ticking the boxes that get them included in ESG funds, and thereby misleading the punters who think their money is being invested with the good guys.

Standardisation is not the answer

?Read the business and financial press at the moment and you’d think that the lack of standardisation around ESG issues is the culprit here. And that the answer must therefore be to create a set of reporting standards and metrics akin to those that exist for reporting and verifying financial performance. But this entirely misses the point. Boohoo did not fail on the ESG front because it didn’t tick some boxes, but rather because behind the tick in the supply chain box was a set of platitudes with no real substance.

Read the report, not the checklist

In Boohoo’s 2019 and 2020 annual reports you’ll find statements like ‘We strive for high standards in ethics throughout our supply chain and our focus on sustainability has been sharpened’ and ‘A central theme of our programme is that of transparency and compliance across our ever-expanding supply chain, with the aim of having a positive social impact and reducing our environmental impact throughout.’ But no supporting evidence.

Go to the mitigation column of their supply chain risk section (both 2019 and 2020 reports) and you’ll find: ‘Regular auditing of suppliers, unscheduled inspections and imposition of conformance agreements ensure adequate standards are maintained in the supply chain as far as possible.’ But again no supporting evidence – how many audits, where, what issues did they discover?

The 2019 report also said ‘…we have… worked with Leicester Council and the government Head of the Vulnerable Workers Team since November 2017, highlighting the health and safety issues and risks to those vulnerable workers in buildings not considered fit for purpose and at a risk of exploitation. Since 2016 we have been proactive in ensuring all suppliers have no presence in such areas and have supported suppliers by helping them move into suitable premises.’ Really?

The 2020 annual report suggests that perhaps Boohoo had some inkling that all was not well, since ‘we are working with a third-party consultancy to build a new compliance programme that will focus initially on our UK supply chain and will then extend across our full, global supply chain’ and ‘[we are] rolling out [a] programme of performance improvement.’ But again, nothing on what this actually means. Which third party? What sort of compliance programme? How much of the UK supply chain? And why all this so late in the day?

Let’s leave aside for the moment the question of how the report got away with making all those statements without any substance behind them (did the directors actually read what they were signing their names to?). Those who included Boohoo in their ESG funds no doubt did their homework in the sense of checking that disclosures were being made around ESG issues. But they certainly did not when it came to what lay behind these disclosures, as any cursory examination of the annual report would have shown.

Let’s hear it for substance

It’s true that reading an annual report and using your common sense to judge whether a company is genuinely a good investment and has its risks under control requires far more effort than getting a machine reader to check that words like ‘compliance programme’ or ‘mitigating our supply chain risk’ – or whatever else your boxes require – are included. Such tools do of course have their place – to sift out the real cowboys before you start. But they are not enough on their own.

What we really need is thorough, thoughtful reporting on ESG that requires individual companies to determine what is genuinely material to their business and then to tell the story behind the disclosure boxes. And that way, ESG really would mean more than ‘everyone’s spouting green’.

Read more on the ESG debate in my book, Trust me, I’m listed (chapter 2 if you’re wondering!).