ESG and Wok-ism
I have seen political agendas and intense rhetoric pit people against one another for much of my adult life. The recent attempt to align ESG investing with the politically concocted term “woke-ism”, has only fueled my distaste for the subject.
I love people.
I love capitalism.
I love money.
I love our planet.
The order of fondness changes daily.
This article is not meant to lay question to anyone’s political beliefs, but rather to shed light on what ESG truly is. Confidently speaking, I can say it is NOT something that should be weaponized or vilified by alignment to a term as arbitrary as "woke-ism."*
Upon researching the history of “Woke” and how the word has been altered and transformed into “Woke-ism”, I had difficulty finding an unbiased perspective. If it’s a topic you’re interested in learning more about, I would recommend reading a blend of published work available for a more holistic understanding.
ESG: An Overview
For those unfamiliar with the often mis-understood concept of ESG, it is essentially an analysis framework that is centered around sustainable business practices. Investors interested in sustainable investing will use ESG metrics and information to assess the suitability of an investment, along with traditional financial reporting.
The three pillars are as follows:
(E)nvironmental – helps stakeholders understand how a company performs as a steward of the physical environment. The "E" considers a company's utilization of natural resources and the effect of their operations on the environment, both in their direct operations and across their supply chains.
Think zero waste, greenhouse gas emission reduction, and proper hazardous waste disposal.
(S)ocial – helps stakeholders understand how well leadership manages its relationships with stakeholders, employees, and customers.
Think employee safety, diversity, fair wages and community engagement.
(G)overnance – helps stakeholders understand the systematic approach and mechanisms that an organization has in place to ensure that the company is executing on environmental and social issues.
Think executive incentives, shareholder rights, transparency and internal controls in place.
ESG: Powerful ROI
The consideration of ESG criteria as a tool for financial evaluation is a concept that has been around for decades**. To put it plainly, ESG is another way to assess risk exposure within an organization.
When we consider ESG metrics, the data that fuels that criterion permeates the entire organization, from HR to operations. Every investor will still consider traditional financials, but the addition of ESG factors add another layer of clarity into an organization's future ability to provide value. There is also a powerful ROI for organizations that choose to invest in improving their ESG scores.
Let’s look at each pillar:
(E)nvironmental
- Reduction in carbon emissions means savings in carbon taxes (currently at the state level)
- If organizations have the systems in place to quantify the volume and types of waste down to the site level, they can then optimize how to efficiently dispose of all of that waste, leading to cost savings. Companies can also refine their operational processes to become more efficient as a business, leading to cost savings. I have also personally seen organizations identify waste and re-sell recyclable material to be repurposed into other products, leading to direct revenue.
- Reduction in environmental fines and compliance risk, which is often millions of dollars in daily risk across the business.
(S)ocial
- According to McKinsey’s recent report Diversity Wins: How Inclusion Matters, organizations with a more diverse workforce outperforms more often than those without. The relationship between diversity on executive teams and the likelihood of financial outperformance has strengthened over time as well.
- Pay equity boosts employee morale, resulting in a higher level of productivity.
- In an IBM study, Employees More Likely to Accept Jobs from Sustainable Companies, which means less time and money spent interviewing, sourcing, recruiting and replacing talent.
(G)overnance
- Better governance and management within an organization develops a brand of transparency and accountability. As a result, this will lead to more trust from stakeholders and potential customers alike. Organizations with high trust close deals more often (more revenue) than those without such a reputation.
- Better governance means less failed projects and sunk costs.
*If you’re interested in diving deeper into the history of ESG, check out this article - Demystifying ESG: History & Current Status - written by Besty Atkins / published by Forbes, which delivers an excellent breakdown.
ESG: Immaturity
History often repeats itself, so it’s important to recognize that financial regulatory reporting and disclosures have been a work in progress for nearly a century. When the Security Exchanges Act was enacted in 1933 and the SEC was formed off the back of the Great Depression, investors needed structure in order to gain the confidence to invest.
There are concerns around ESG investing, as it stands today. Many organizations are committing to goals and targets without a real strategy in place. There is not a unified standard globally in which companies are required to report information, leading to a lot of the ESG metrics being “greenwashed” and empty promises, regardless of intention. This will evolve over time, as registered companies adopt a standard that will be audited by the Big 4, like traditional financial statements. Until then, ESG will be subject to criticism.
To refute that ESG with the proper mechanisms and oversight is an indicator of investment risk, is a dangerous sentiment with unfavorable outcomes for our planet, our people, and our wallets.
Bobby Hite
