Another negative article on environmental, social, and governance (ESG) criteria recently appeared, claiming ESG is on the decline. There has also been a series of rebuttals and social media posts declaring everything is fine with the overall concept and term.
Like most things, reality is probably somewhere in the middle.
To say or not to say ESG
The article that started the latest round of fierce ESG debate comes from the Wall Street Journal, entitled The Latest Dirty Word in Corporate America: ESG.
Among other things, it declares the term “ESG” is being used less often and replaced by alternatives such as “responsible business” or “sustainability.”
The Wall Street Journal article says the number of businesses mentioning ESG during earning calls rose steadily until 2021, but the practice has since declined. During the fourth quarter of 2021, 155 companies in the S&P 500 mentioned ESG initiatives, but by the second quarter of 2023, that number had fallen to 61 mentions.
The article makes credible claims backed by facts.
For example, this sentence may be among the most revealing: “A December survey by the advisory firm Teneo found that about 8% of CEOs are ramping down their ESG programs; the rest are staying the course but often making changes to how they handle them.”
This observation highlights a growing trend that organizations should be aware of: Companies continue to abide by the principles of ESG, but there’s a possibility the term ESG may evolve toward something else.
The principles of ESG will remain
There are three primary reasons why the core values expressed through ESG criteria are here to stay.
1) Regulatory compliance
Sustainability reporting and climate disclosure regulations are both a mandatory and essential part of today’s compliance landscape for most organizations. The European Union (EU) leads the way with its Corporate Sustainability Reporting Directive (CSRD), which also applies to non-EU firms based on certain conditions. Check out how the CSRD will impact U.S. firms for more insight.
In addition, while there is uncertainty around the timeline of the U.S. SEC’s climate-related disclosure rules, California has moved ahead by passing the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (261). SB 253 will require all U.S. firms with revenues greater than $1 billion and doing business in California to disclose carbon emissions. SB 261 will require all U.S. firms with revenues greater than $500 million and doing business in California to report climate-related financial risks.
There are similar regulations from other parts of the world that global organizations must likewise follow.
2) The supply chain
Some firms may not be getting big pressure from investors or non-governmental organizations (NGOs) to improve their social or environmental performance (at least not yet). They may also not be directly impacted by any ESG regulation. But it’s conceivable a company could be impacted by what might be described as a “supply chain domino effect,” forcing changes to business processes or products.
Many organizations today are part of multi-tier supply chains and, if any actor in that supply chain is impacted by an ESG regulation or faces pressure to improve its ESG performance, that organization may be impacted.
For example, an organization may sell components to a parts manufacturer, who in turn sells parts to an automobile manufacturer. However, let’s say the automaker wants to reduce the carbon footprint of its cars or its Scope 3 emissions. They’ll closely scrutinize the carbon footprint of those who manufacture individual parts and components for them and assess the carbon emissions of those suppliers. Perhaps some of them would be replaced by suppliers that generate a smaller carbon footprint and produce lower emissions.
Developments like these can be triggered by a single large or key actor in a supply chain that is either impacted by an ESG regulation or faces pressure to improve its ESG performance.
3) The velocity of reputational harm
Poor environmental and social performance can seriously undermine and even destroy an organization’s good corporate reputation. The public is increasingly unwilling to work for, buy from, partner with, or invest in companies not perceived as doing right for the planet and people. This trend will amplify with Generation Z.
The velocity of reputational harm is another major concern. Bad publicity associated with a controversy around an environmental or social issue spreads quickly throughout the world via social media, and brand damage is often caused before a CEO or a company spokesperson can address the issue.
It’s wise to integrate ESG factors in operations and business decisions, considering the tangible business and financial consequences of reputational harm, and the speed at which reputational risks may materialize.
The right question to ask about ESG
Whether you call it ESG, responsible business, or sustainability, it’s critical to track and highlight your ESG efforts. ESG-type concerns and regulations will continue to rise in importance and it’s reasonable to expect them to have much greater impact and relevance going forward.
The principles of ESG are here to stay, regardless of terminology. An important question to ask is whether your efforts to protect people and the planet are where they should be. Is your organization equipped with the right software and technology to extend your ESG efforts to go beyond compliance and produce a competitive edge? How you address the last question will have great consequences for your business.