Scrutiny of the corporate world’s performance on environmental, social and governance (ESG) issues is growing all the time among investors large and small. Many of us believe that as well as creating profits, companies should behave like responsible citizens—and we expect those who invest our savings to act as referees, making sure they do.
How realistic is that in practice? Outsiders often struggle to work out what’s really going on inside companies because it is the companies themselves that control what information about their activities is published. The never-ending stream of frauds and accounting scandals proves this all too clearly.
But major challenges would remain even were we to overcome the information gap. The trickiest is that ESG ambitions encompass such a wide agenda—everything from reducing carbon emissions to ensuring the company’s leadership is sufficiently diverse—that few companies are likely to satisfy all the demands. For every example of a company doing something positive, it’s always possible to point to a negative and shout about it on social media. How do we stop the whole subject turning into a set of impossible aspirations?
My conversations with various investors in both public markets and private equity have produced some practical suggestions. Firstly, we need to be pragmatic. Some issues of corporate conduct matter more than others and those who manage our savings must take a clear, reasoned position on which aspects of a company’s activities and behaviour are material and which are less so.
One way to do this is to encourage companies to measure and disclose the positive and negative impacts of their activities, especially on the environment and society. These will obviously vary a great deal, depending on what business the company is in. A heavy manufacturer should probably concentrate on issues such as energy-efficiency, carbon emissions and employee accident rates, for example. A bank might be more concerned with financial inclusion, access to credit and encouraging diversity in its workforce that reflects its customer base. As these examples suggest, measuring impact is hard to do but if ESG is to mean anything there must first be transparency.
Finally, we must all accept that companies cannot achieve what we hope for on their own. We, as individuals, must change our behaviour to effect small but positive changes. And governments must use regulation and redistribution of resources to offset the negative impacts of corporate decision-making. Capitalism’s “creative destruction” must be allowed to operate but the negative social outcomes it can create must be mitigated. That is the government’s job.
We are all bound by the ESG agenda: seeing it as the preserve of companies alone is to miss the point entirely.