Does ESG matter?
ESG is under increasing scrutiny, the reason is very simple: ESG is driving investment with more than $649B invested in ESG-focused funds in 2021.
ESG which stands for Environmental, Social, and Governance brings the promise that we can monitor companies in those 3 dimensions to drive investment towards companies that are doing good for people and the planet…sounds too good to be true? Can we simply monitor companies on 3 dimensions that are most of the time seen as a brake pedal to profits and revenues rather than a list of opportunities to act ethically and grow business?
Unfortunately, the answer is quite simple and it doesn’t take long to guess it: a resounding ‘No’
ESG has been coined by investors for investors
Let’s go back to where ESG is coming from. First of all, it is important to understand that ESG is not a standard, the ESG indicators are not an international set of indicators and metrics commonly accepted to look at how companies perform. It is a moniker that was created in 2005 at the WhoCaresWins conference brought by institutional investors…with no involvement of executives of companies part of the real economy. The idea was excellent and the questions asked at the time were important but it lacked an implementation plan for companies.
Nevertheless, it created a wave of new rating agencies trying to understand who is doing good, who is not and how to improve the situation. The result?
Well, let’s be factual and look at the overall results. I am not denying that the ESG lens enabled some form of progress and resulted in bringing awareness to E or S issues in a few industries…even though those issues were long documented.
As ESG gained popularity, a consolidation happened in the industry with the traditional rating agencies buying the newly formed ESG focused agencies…was the intention really improving the World?
More recently we have seen debates on trying to prove that ESG driven companies are bringing more return to convince investors this is the way to go. It would be so easy to so re-assuring that we would just need to monitor companies to allocate capital without doing the hard work of helping companies in their execution.
The emergency of climate change mostly due to industry emissions, the recent scandals of great ESG performing companies encouraging shameless behaviors for the sake of profits, and the war brought by Russia on Ukraine is shedding a dark light on the use of ESG data that don’t seem to be accurate at all.
From ESG to Raison d’Etre
What do we do then? There has never been so much capital ready to be invested, the amount of dry powder by private equity and venture capital funds keep increasing, investors are all chasing the right projects…meaning projects that bring the right return. Several of our brain cognitive biases (confirmation bias, selection bias, hyperbolic discounting bias) make us want to believe that we just need to find the right data to rate companies and select the right projects.
It took years for the world to start agreeing on how to count money and even today Europe and US don’t agree 100%…
- Do we truly believe we are all going to agree on how to measure and rate organizations' impacts on environment and social (leaving aside the governance piece for a moment) ?
- Do we really believe that all it takes is investing in the right projects and wait for the annual ESG report?
ESG is not focused on the impacts a company, an organization is having. It is self-centered (Scope 1 and 2 for the Carbon accounting geeks) and not stakeholder based.
If we want to drive change (and we need change), we need to measure impacts, communicate, disclose and report transparently those impacts and be aware of thresholds.
I believe that a very important first step is to think about our own Raison d’Etre and an organization’s Raison d’Etre, find the answer of why a company exists in the first place.
What is ESG true Raison d’Etre?
