The Responsible Business Debates of 2021

While responsible business might seem like a bandwagon everyone's jumping on, the issues are much more nuanced with arguments on goth sides. As 2021 draws to a close, I thought I'd recap some of the debates that I've contributed to over the past year.

Is Sustainable Investing a Dangerous Placebo?

Tariq Fancy, BlackRock’s former sustainable investing chief, caused a splash in August when he?claimed?that sustainable investing is “a dangerous placebo that harms the public interest”, “like selling wheatgrass to a cancer patient”.?This ruffled the feathers of many ESG advocates, who immediately got on the defensive and started arguing why he must be wrong. However, despite being an advocate for sustainable investing, I acknowledge that some of his concerns are valid - but others are not, in particular their sweeping nature (you can't tar all sustainable investors with the same brush). In Is Sustainable Investing Really a Dangerous Placebo?, I explore the complex colours of a topic often portrayed as black or white.

Another concern with Tariq's essay is that, even though it ran to 40 pages, it didn't cite any evidence but only anecdotes. In Guest Viewpoint (an invited article for IPE), I discuss the rigorous research on sustainable investing - some supports Tariq, some doesn't.

The Wall Street Journal invited Tariq and me to do an email debate on his essay, which they wrote up in Does Sustainable Investing Really Help The Environment? I thank Tariq for engaging in the debate with me.

The black-and-white portrayal of sustainable investing extends way beyond Tariq's article and the indignant responses to it. Some studies were released in 2021 claiming that sustainble investing always pays off (and were lapped up uncritically by advocates); other studies concluded that it never works (and were widely shared by sceptics). In my letter to the Financial Times, ESG Studies Must Show Scientific Rigour to Avoid Feeding Biases, I encourage readers to assess research by its accuracy, rather than whether it supports our personal beliefs on ESG.

Diversity

An influential study claimed in its Executive Summary to have found that “Higher levels of gender diversity of FTSE 350 boards positively correlate with better future financial performance (as measured by EBITDA margin).” Yet the claim was false - the study ran 90 regressions relating diversity to EBITDA margin, but 0 were significant. However, many people took this claim at face value, partly becuase they wanted it to be true (I do, as a diversity supporter and ethnic minority myself) and partly because the study was co-authored by a leading business school that claimed to use the "rigour and care of our best scholarly research" so readers thought they could trust it.

This misportrayal is not only disingenous; it's unnecessary. We don't need a business case for diversity ("do it to improve our EBITDA margin") because there's already a strong moral and ethical case. Moreover, what matters is diversity and inclusion; blunt measures of diversity such as women or minorities on the board fail to capture many other dimensions of diversity, and completely ignore inclusion. I make these points in my Telegraph op-ed No, Boardroom Diversity Does Not Mean Higher Profits. I discuss the broader diversity debate, including what the most careful academic research on demographic diversity finds, and suggestive evidence on the benefits of diversity and inclusion, in Is There Really a Business Case for Diversity?

The Financial Conduct Authority published a discussion paper on whether to mandate diversity in the financial sector. However, its literature review was highly selective, containing many unpublished papers and ignoring seminal studies that uncovered "inconvenient truths". My response to the FCA consultation is here.

ESG Metrics

The calls for companies to report evermore ESG metrics are growing louder by the day. Advocates argue that a common set of metrics will lead to greater accountability - allowing the public to evaluate which companies are truly "walking the walk". But in The Dangers of Sustainability Metrics, I emphasize caution. Many dimensions of ESG are qualitative, and mandatory disclosure will encourage companies to focus only on the quantitative dimensions that can be disclosed. In No Stakeholder Left Behind: The Dangers of ESG Metrics, I highlight how 2021's arguments for ESG metrics echo 2001's arguments for standardised tests in the No Child Left Behind Act, which led to "teaching to the test".

Companies are going further and not only reporting ESG metrics, but tying CEO pay to them. It seems obvious that they should do so, else these metrics won't have bite. But as essayist H.L. Mencken is often paraphrased, "Every complex problem has a solution that is simple, direct, plausible - and wrong". In Why Companies Shouldn't Tie CEO Pay to ESG Metrics, I highlight several reasons why this practice may backfire.

The Business Roundtable Statement

Two years have passed since 181 CEOs signed the Business Roundtable statement pledging to serve wider society. But there's an ongoing debate as to whether these words have been backed up by actions. In Two Years Later, Has the Business Roundtable Statement Transformed Capitalism?, I lay out the arguments on both sides.

More broadly than the BRT statement, is stakeholder capitalism any more than fine words? The Financial Times' Gillian Tett hosted a debate between Harvard's Lucian Bebchuk and me on The Promise of Stakeholder Capitalism: Illusory or Real?