In recent years, corporations, investors and consumers have shown increased interest in business practices that go beyond the basics of how goods and services are produced or sold. “ESG” is a set of criteria that measures a business’s commitment to Environmental, Social, and Governance (ESG) principles.
Everyone loves the party game “Two Truths and a Lie.” Can you identify which of the three following statements about ESG is a lie?
A. There is no clear consensus or definition for what ESG criteria include.
B. Embracing ESG has shown to improve a company’s profits.
C. Companies are embracing ESG in response to shareholders.
Let’s take these statements one at a time:
A. TRUE! There is no clear consensus on what exactly fits the ESG criteria, so inclusion of these principles can look very different in practice.
Companies can adopt ESG in various ways. These range from the more radical approaches of embracing “net-zero” pledges, implementing anti-racism training, and imposing corporate diversity quotas to the more benign approach of companies trying to take a more sustainable approach to investments or improving working conditions or benefits for their employees.
B. FALSE! Embracing ESG concepts have neither proven to boost profits nor harm them. At this time, it’s too early to determine if embracing ESG concepts will harm a firm’s performance, and unless ESG concepts become strictly defined, this will be impossible to measure in the future as well. However, a 2017 study from India found that a social responsibility investment requirement actively hurt the value of companies. At the moment, the ESG investment approach is much more broad and less likely to show clear harms across the board, but if companies adopt the radical side of this approach, it will likely hurt their bottom line in the long run.
C. TRUE! While some companies are responding to the political climate and embracing ESG as a form of virtue signaling, many companies are beginning to adopt ESG principles at the request of their shareholders or consumers. Incorporating ESG principles into business practices can be a good and admirable approach. Every firm, from Starbucks to Hobby Lobby, should be free to do business in accordance with a set of values and principles. Investment firms, too, should have this freedom.
Companies, and investors, should not use ESG concepts to simply score political points or virtue signal that they are a part of a new “woke elite” in the U.S., but should carefully consider how their choices and business practices ultimately foster a prosperous, free and fair society.
Undoubtedly, every business should act ethically and legally. Every business should treat workers and investors with respect and should be transparent. Every business should consider how its practices impact the environment and society more broadly. It’s admirable—and indicative of our wealth—that so many Americans show interest in how businesses behave.
Sadly, many firms go off-course during attempts to incorporate “social responsibility” or other ESG principles, because rather than truly considering the consequences of their behavior, firms jump on the bandwagon of political wokism. To correct course, firms, investors, and consumers should focus on ways to truly make the world a better place.