Time to Focus on the G In ESG?

A recent article in the Financial Times explored “The Real Impact of the ESG Backlash .”

I think the real impact of the ESG backlash could be very positive, in the eyes of those who are concerned about environmental sustainability and social responsibility.

As the FT article notes, ”the vast majority of investors and fund managers incorporate climate and social risk factors into their decisions even if they do not call it ESG.” They do so because, despite the backlash they “continue to rake in cash.” Blackrock, a firm targeted in the Republican Party led backlash is a case in point. The $3bn in withdrawal from Republican led states is dwarfed by the $5oobn net inflows it received, for example. ??

If investors and fund managers incorporate environmental and sustainability issues n their decision making, directors and executives will have to.

Critics of my comments will rightly point out that investors and fund managers fall short when considering these issues and need to do more. To that I would say I think they would also agree. To this they would argue that all the competing reporting initiatives, regulatory guidance frameworks and ‘noise’ on ESG is incredibly unhelpful in their efforts to make improvements. Investor relations people at some large multinational corporations have expressed this point to me directly.

Critics will argue that I am being na?ve in making the suggestions I have. Perhaps I am. And I do accept that some investors and fund managers will not give a damn about these issues. But I remain hopeful when I read that “Massachusetts State Pension Fund voted last week to change the name of its ESG Committee to the Stewardship and Sustainability Committee.”

Stewardship – ensuring the proper utilisation, preservation and protection of resources, assets, and relationships for the benefit of their stakeholders, including shareholders – should certainly be the focus of investors and fund managers, and they need to get better at it. And, for the record, I deliberately chose not to say “owners,” because shareholders are owners of shares, not the company.

Good stewardship involves investing in the right companies and holding the board of the company accountable for good governance. Investors and Fund Managers have not been good stewards, and I have repeatedly criticised them for that. But that is the problem we should be focused on, rather than defending ESG against the backlash.

We will see improvement in both stewardship and governance when, rather than focusing on ESG, the focus is switched to demanding good stewardship. Good governance and the accountability of boards will flow from that.

Good stewardship and governance must include accountability for decisions concerning environmental and social responsibility. To not incorporate these factors would be grossly negligent and reckless, exposing the organisation to great risk, and directors to accusations that they are failings to take fiduciary responsibilities seriously.

In an article for the London School of Economics, I made the case that to achieve sustainable flourishing and wellbeing – the conditions in which businesses and organisations can themselves flourish – radical new thinking is required in three areas simultaneously: economics, accounting and management. To that list I will add finance and investment.

A core argument in the article proposed, these disciplines, if they are to be given the status they aspire to, must adopt a "Noble Cause" – the creation of sustainable widely shared prosperity, measured in terms of flourishing and wellbeing, Eudaimonia as Aristotle called it.

In doing do they would help businesses and organisations focus on goals that would ensure they fulfil their social contract obligations, to earn the right to operate that society grants them. And, in the article, I proposed the addition of Social Contract Accounting to Financial Accounting.

Social Contract Accounting may sound like more unwelcome regulation and ‘red tape,’ but we already have the basis for such a contract in the form of the Johnson and Johnson Credo, the best business Purpose Statement I have ever read.

Accounting associated with such a statement would measure performance using a multi-capitals approach similar to that advocated by integrated reporting initiatives in recent years, plus company specific performance indicators.

To conclude, the real impact of the ESG backlash could prove to be a very positive development, if we focus attention on good stewardship and good governance instead, ensuring that “good” means environmental and social responsibilities are embedded in all decision making and accountability frameworks. ????