By Roy Snell
Lucy Pérez, Vivian Hunt, Hamid Samandari, Robin Nuttall, and Krysta Biniek have written an excellent article on ESG for McKinsey. You can find it here…ESG is essential for companies to maintain their social license | McKinsey
It is an excellent article because it shares facts and relevant information rather than the hysterical rants of the extremists and activists on both side of the ESG debate. The article pulls from experts and research, otherwise known as critical thinking, which is rare in the ESG world. I am going to share some highlights from the article. If I were you, I would share the McKinsey article with leadership. Feel free to share this post. I have a summary of the article here and make some comments about my own views related to the complaints about ESG. There may be a part two to this post because there is so much great information in the McKinsey ESG article.
They share the fact that Environmental, Social and Governance searches are rising rapidly and Corporate Social Responsibility searches are declining. The passing of the torch is good news because CSR is a narrower approach. Companies of all kinds are implementing ESG programs. McKinsey reports that a vast majority of the Russell 1000 and S&P 500 companies are now reporting their ESG business acumen annually. Jurisdictions around the world are making ESG reporting mandatory. They talk about the SEC ESG enforcement activity in the US which is very important indication of where ESG is going. They also have the obligatory discussion about ESG investing which is dominating the discussion about ESG and drowning out the important reasons to get behind implementing an ESG program.
The McKinsey article acknowledges the fact the E in ESG is drowning out the S and G. However, they do mention that there was a 37 percent increase in socially related shareholder proposals in 2021. And the authors invoke the name of my favorite psychological model, Maslow’s Hierarchy of Needs, while starting a discussion of a list of concerns leadership has about ESG. I list the concerns in this post and my response to the concerns. The authors have a response to each of the concerns that I was careful not to read until I was done editing this so I/we could see if any of my perspectives are similar to theirs. I don’t often think or write like other folks so you will probably get different perspectives.
ESG is not desirable, because it is a distraction.
Ironically, ESG will become a distraction if leadership ignores it. ESG is already everywhere in the company. If leadership is not actively involved now… extremists could divert too much money and time and harm the company’s main mission. You could also have the opposite problem with the “I hate ESG” extremists who could limit ESG to the point of failure. Many of you are reporting ESG now and risking being accused of greenwashing if you don’t implement and ESG program to make sure the reporting is accurate. If you want a distraction, exaggerate your ESG acumen and get investigated by the SEC or commit death by social media if the public finds out. That’s a real distraction.
ESG is not feasible because it is intrinsically too difficult.
Is it too hard to teach employees about the company’s policies related to social responsibilities such as – racism is not allowed? Is it too hard to annually audit the disposal of environmentally dangerous chemicals? Is it too difficult to outline the kind of culture the governing board wants the company to have? Not only is the answer to all three questions no, most companies are already doing all this.
ESG is not measurable, at least to a practical degree.
ESG is more measurable than legal, so should we eliminate the legal department too? There are standards bodies that list the metrics relevant to your industry. There are ESG software systems such as the one developed by the company I am an advisor for, Osprey ESGManager, that load these metrics, let you edit the metrics and most importantly help you monitor, manage and improve the ESG measurables throughout the year. Reporting is more accurate and more automated. Software makes ESG data more available to people in operations who can then take action to improve their ESG metrics. It gives them a confident base of info to act from.
Even when ESG can be measured, there is no meaningful relationship with financial performance.
Let’s try this logic with other departments. Audit, HR, accounting, and finance can’t be measured against financial performance so those all have to go too? All these departments are good for the company, are mandatory to run a successful company and can’t be measured… yet we still have them. The key is to make sure none of them cause the company to take its eye off the company mission.
I loved this article. I wish there was more critical thinking in ESG. Instead, the dominating force right now is people running up and down the hall with their hair on fire either for or against ESG. I may write another post related to this article as there is more, including a list of the positive impacts ESG programs are having on companies. Enjoy.