Why ESG is here to stay
There could be a deeper reason behind the fact that we humans care about ESG nowadays.
A hierarchy of needs
“It is quite true that man lives by bread alone — when there is no bread. But what happens to man’s desires when there is plenty of bread and when his belly is chronically filled?”.
Maslow’s answer to this question in a 1943 paper became one of the most widely used frameworks about human motivation. His ‘Hierarchy of Needs’ theory set forth that human beings have certain needs — some more pressing than others — that are essential to understand why humans behave the way they do.
From the bottom of the hierarchy upwards, the five types of needs are physiological needs, safety needs, love and belonging needs, esteem needs, and self-actualization. Grouped differently, they can also be categorized into basic needs, psychological needs, and self-fulfillment needs. These needs must be fulfilled in that particular order (more or less) and humans crave the next need in the hierarchy once one need is fulfilled.
Although criticized for not taking into account individual or cultural differences, among other things, Maslow’s theory offers a simple and intuitive explanation for human behavior, hence its popularity in many fields beyond psychology today such as in sociology and management training.
To illustrate its intuitiveness: when moving into a new home, one would probably prioritize basic things first (cleaning, filling up the fridge), before dealing with securing the home (installing a security system). Once this is set, one would start inviting friends and family over. And over time, one would focus on comfort and aesthetics (buying nice furniture and advanced home appliances).
So, what can this theory tell us about the world today?
We’ve never been better off
Looking at data on global living conditions today, we can conclude that humans are living better than ever before in modern history. According to Our World in Data, at least five key indicators demonstrate that living conditions have significantly improved since the early 1800s.
Just taking one example, the share of the global population living in extreme poverty has fallen significantly, from 94% in 1820 to around 10% in 2015. Other measures of education, health, and even democracy also display considerable improvement, revealing the massive advancements in the quality and comfort of human life.
Considerable challenges remain today of course — about 1 in 10 people worldwide live in extreme poverty and are suffering from hunger for instance. But looking at the world overall, it is undeniable that humans have never been better off.
Accordingly, if we apply Maslow’s theory, modern-day humans would be pursuing the next needs in the hierarchy: psychological needs (for love and self-esteem) and self-actualization.
Despite great variations at the individual level, basic societal institutions already answer people’s psychological needs. Humans receive love and recognition in family settings, at school, or in the workplace. On top of that, there is a variety of other diverse groups, offline or online communities, that can provide people with a sense of belonging and individual worth.
Then naturally, with all their other needs fulfilled to certain degrees, we can assume that a large number of individuals around the world today would be in quest of self-actualization.
Striving for ESG as part of self-actualization?
‘[Self-actualization] refers to the person’s desire for self-fulfillment, namely, to the tendency for him to become actualized in what he is potentially.’ — Maslow, 1943, p. 382–383.
Different from the other needs, self-actualization is a ‘growth’ need that is derived not from a lack of something but from a desire to grow as a person. The way individuals reach self-actualization varies from person to person, but essentially, ‘self-actualized’ people are concerned with the welfare of humanity and have strong moral and ethical standards.
Seen from a larger perspective, this striving for self-actualization by a large number of individuals could explain the global trends related to qualitative and philanthropical aspects of life, broadly included in ESG factors.
Global ESG Trends
If we start with consumer trends, despite distinctions based on age and income (younger people care more about sustainability and people with higher incomes are more likely to actually make sustainable purchasing decisions), consumers overall are clearly concerned with sustainability to increasing degrees.
According to a study by Simon-Kucher & Partners, “78% of global consumers feel that environmental sustainability is important, like the idea of being sustainable, and want to live more sustainable lives”.
In South Korea, the term ‘Meaning Out’ has been coined to speak about consumers who express their concerns for sustainability, social, or political issues through consumption decisions, such as boycotting what they perceive as ‘immoral companies and their dishonest executives’.
Pressured by the expectations of consumers that are unforgiving to companies that get it wrong, businesses are increasingly forced to reflect sustainability in their production methods, policies, and legislation.
In the fashion industry, Patagonia might be the best example of a company that understands consumers’ concerns, famous for its ‘Don’t Buy This Jacket’ ad and giving away the company to fight climate change, but even high-end fashion brands are adapting their production methods: Prada, Gucci, and Burberry use regenerated nylon ‘econyl’ and Hermès uses vegan leather made out of mushrooms.
Other companies famous for aligning with ESG but with different approaches are TOMS shoes, which donates one pair of shoes for each pair sold (until recently), and United by Blue, which removes one pound of trash for each product sold.
In the food industry, from simply using fair trade and ecolabels, new businesses are trying to reinvent their production methods as well: by making plastic using avocado waste, and bacon (and styrofoam) using mushrooms for instance.
Many more examples could be listed, but the point is that companies miss out on huge profits if they do not push for sustainability.
This strong consumer pressure has also had ripples on the public sector and national legislation. The European Union and United States are currently working to build in sustainability requirements into their official legislations.
On top of that, the International Sustainability Standards Board (ISSB), established at COP26, is developing a comprehensive global baseline of sustainability disclosures for capital markets. Why this matters? The ISSB framework is being developed by the same institution that created the accounting standards used officially by around 140 countries in the world.
Why ESG is here to stay
The latest example of how far ESG-related consumer pressure can go could be seen with the ongoing war in Ukraine. When the war started companies were pressured to take a stance against Russia. Those that continued to do business as usual faced public backlash and suffered economic losses. Excessive? Perhaps. But it clearly illustrates the idea that ESG is important to individuals that seek self-actualization.
All in all, whether we can afford it or not this collective strive for self-actualization means that ESG concerns are unlikely to go away in the near future, unless there are drastic changes in global standards of living.
