The Business Threat of ESG
ESG is not a synonym for responsible business practices. It is a fundamental shift in corporate priorities and resources away from traditional business-building.
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The innocent-sounding corporate scoring platform Environmental, Social and Governance, or ESG, has been quietly spread around the business world for a few years. It has been embraced by mostly large corporations in heavily regulated industries, who have determined that it is not solely the financial performance of a company that matters but other factors that have nothing at all to do with operating a business.
Rather than assessing traditional business factors such as revenue, profit, debt, market share, stock performance, quality of goods, and other metrics, ESG scores companies according to decidedly non-business factors such as climate sustainability, social justice, and political concerns.
Instead of operating to benefit shareholders, corporations seeking a high ESG score are required to work for the benefit all interested parties – defined as “stakeholders” – a historically vague term which has now been expanded to include just about any entity coming in contact with the company, its products and its services.
Corporate initiatives to advance positive ESG outcomes might sound like a great idea. Partnering with “stakeholders” to achieve sustainable, environmental- and community-friendly operations are something to be desired, right?
By shifting corporate focus away from shareholders and onto “stakeholders,” ESG programs misallocate resources away from business operations and into the hands of those without any financial interest in the consequences of their decisions. What you get are ideologically driven programs having nothing to do with running the business, siphoning scarce resources into projects without clear or consistent purpose.
Investments in regular business operations and those made in ESG are not complementary; companies cannot financially multitask between running the business and satisfying costly non-business metrics without taking a hit on revenue and profitability.
Are there irresponsible companies performing a disservice to environmental and societal concerns? Of course, which is why we have environmental and anti-discrimination laws in place that address these concerns. We have come a long way from the early days of the industrial revolution; companies routinely work toward mitigating their environmental impact and creating a more inclusive working environment. They do so with the understanding that this represents best practice in the 21st century.
A business serves communities by contributing taxes, employing citizens and elevating the overall local quality of life. But business should never be viewed as a “force for good in a society,” a position being more frequently taken by executives who would engage in costly, non-business-related side-projects that deflect scarce resources away from research, development, or manufacturing.
A better approach here would be for businesses to continue the innovation and industriousness that has created once-unfathomable wealth and do so in the most responsible – and profitable – manner. Smart managers and executives already know that sensible, ethical business practices will attract the best talent, drive wage increases and expand markets overall.
ESG is not a synonym for responsible business practices. It is a fundamental shift in corporate priorities and resources away from traditional business-building. And because ESG principles can be modified or changed at any time, it can mean anything depending on current moods. That’s not a solid foundation for any venture that involves investment or allocation of resources.
Companies can manage the business with its shareholders’ best interest at heart, or with ESG at heart. But not both.