Musings on ESG

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???? ???? ?? ??????????????? ??? ?? ???????

Manusmriti, Verse 2.224

In this worldly life, accumulating wealth (????) is certainly acceptable, & if it is within the bounds of dharma (????) (i.e. the two together, ?????????), the goal is worthy (??????) indeed. The pursuit of desire (????) and wealth should be aligned to dharma, and the three (????????) form the foundational goals for a balanced and fulfilled life.?

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ESG principles (“ESG”) have gained significant momentum over the past two decades. Since their formal introduction in 2004 through the report Who Cares Wins by The Global Compact, ESG has moved from the fringes to the center of business conversations. A world that’s burning - figuratively, and as events in the Middle East unfold, literally - has brought these three letters to the centerstage. As temperatures continue to rise, and communities become increasingly fractured, we are turning to companies & investors asking them ‘what are you going to do about all this?’ In all fairness, it would be fair for them to retort that ‘we aren’t the only ones to blame’ or ‘you should question your elected representatives instead’. Admittedly, the business community isn’t the sole reason we are in this mess. But maybe, they could hold the key to a brighter future; and if you look closer that key might just be embellished with the letters, ESG.

For a long time in my own mind, ESG was about a charitable mindset. That companies should take drastic measures to cut down their emissions, safeguard the environment, uplift communities, even if that meant a reduction in profits, and overall valuations. As time progressed, I realised that this approach is naive; which Board in their right mind would sacrifice a healthier EPS in exchange for planting a few more trees! As humans, we’re wired to seek growth and accumulate wealth (just as Manu says in the verse above), and that’s perfectly natural. But the heart of ESG is about more than sacrifice — it's about balance (or I daresay ‘dharma’). It’s about creating wealth responsibly.

For sure companies have to pursue profits (that’s their dharma!), but can be done in a manner that’s sustainable. ESG at its nucleus is about the identification of potential risks - environmental, social and governance - that might have an impact on future earning potential & the ways in which these risks could be tackled. Understanding ESG helps companies better prepare for the future, and in the process develop an enterprise that not just looks after its shareholders, but the wider community as well. In John Elkington’s famous phrase - focus? on the "triple bottom line" - not just profits, but people, and the planet.

To go back in time (& maybe explain why we in this dire situation in the first place), here’s an excerpt from the famous essay in 1970, “A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits”,?

“The discussions of the “social responsibilities of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine of the social responsibility of business is to ask precisely what it implies for whom”

Friedman’s skepticism towards social responsibility might be understandable, given his time. But in the decades since, ESG has risen to meet those very challenges. It has made the business of doing good no longer a charitable endeavor - but a practical one.?

There is nothing altruistic about ESG… and that may be the very reason for it to thrive in the years to come.