Here’s The Problem With Hoping Corporations Will Be Socially and Environmentally Responsible On Their Own
Can corporations truly be a force for good or is environmentally friendly, socially conscious corporate governance a passing fad?
Late November, a not-for-profit organization called Global Canada, published a report called Canadian Voices on the Role of Business in Society that calls on the business community to be better environmental stewards and socially conscious citizens.
“Global Canada believes that the responsibility for global impact cannot rest with government alone. All stakeholders—including the private sector, universities, social entrepreneurs and philanthropists — have an important role to play,” reads its preamble.
The document describes an evolution of thought, purportedly escalated by the pandemic, which sees businesses not solely responsible for delivering profits to shareholders (“shareholder primacy,” as once described by neo-liberal economist Milton Friedman), but as having a role in furthering social good.
Is this an effort to co-opt the justifiable critiques of the for-profit-sector that has, for too long, failed to be held accountable for the unsustainable growth mindsets which have ravaged the earth, led to a race to the bottom and increased disparities among the majority of the world’s populations?
Or is it a legitimate attempt to do better?
The Rise of Environmental, Social & Governance
ESG is a framework which sets out to ensure that businesses incorporate the risks of environmental, social and governance aspects of their operations. The benchmarks go beyond economic considerations, requiring companies to situate their practices within the realities of climate upheaval, promoting equality, social change and progress, and other non-financial considerations.
“ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis, yet may have financial relevance,” wrote a business writer for Forbes magazine. “This might include how corporations respond to climate change, how good they are with water management, how effective their health and safety policies are in the protection against accidents, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.”
The concept was advanced in a 2004 report by the United Nations Global Compact in 2004, following an invitation by then-Secretary General Kofi Annan in which he invited CEOs and representatives from 20 financial institutions from nine countries to integrate social and corporate governance in the traditional model of calculating a company’s worth.
The 2004 document, “Who Cares Wins: Connecting Financial Markets to a Changing World”, heralded the UN Principles for Responsible Investments, aligning business values with the Sustainable Development Goals at the New York Stock Exchange and launching the Sustainable Stock Exchange Initiative.
Even before that original invitation, Annan had created the UN Global Compact, which brought companies and institutions together to commit to doing “business responsibly by aligning their strategies and operations with Ten Principles on human rights, labour, environment and anti-corruption; and take strategic actions to advance broader societal goals, such as the UN Sustainable Development Goals, with an emphasis on collaboration and innovation.”
Economic Survival Versus Economic Supremacy
An article in the Harvard Business Review last year pointed out that “companies are likely to be more resilient in the face of unexpected shocks and hardships if they are managed for the long term and in line with societal megatrends, such as inclusion and climate change.”
So a cynic would conclude that ESG’s aren’t only about the moral imperative, but about the bottom line for companies seeking the competitive edge.
The 2021 Deloitte annual survey of Millenials and Gen Z found that less than half of respondents consider business as a “force of good.” Larger segments of young people, women, and people of colour are looking to invest money into companies that are socially responsible.
In fact, young people are estimated to inherit over $24 trillion dollars in wealth over the coming 10 years in the US alone, noted Majid Mirza, CEO and co-founder of ESG-Tree, a Waterloo-based company that specializes in providing ESG cloud tracking software for private equity and venture capital firms. “Their investment questions matter.”
Is “Stakeholder Capitalism” a Good Kind of Capitalism?
That capitalism as we know it has failed to provide adequate living standards to the majority of the world’s populations is clear. An article in the Harvard Law School Forum on Corporate Governance concludes as much:
“The laws, regulations, and culture that currently govern U.S. capital markets are designed as if the purpose of business were unrestrained profit, regardless of the damage caused by earning that profit.”
This design is not accidental and arises from two linked ideas: First, that focusing on individual company financial return will protect shareholders (“agency theory”); and second, that such focus will optimize the allocation of resources in the economy (the “invisible hand”). The blunt application of these concepts without concern for market failures has created a broad culture of shareholder primacy.”
Instead of shareholder primacy, many of those critical of the status quo have been advancing the notion of “stakeholder capitalism” instead.
The authors of the Harvard paper went so far as drafting The Stakeholder Capitalism Act which outlines how to make legislative changes that would “correct market failures that allow for profits derived by extracting value from common resources and communities, including workers.”
Yet, there are critics of this approach, from both the right and the left. Last summer, Gen X entrepreneur Vivek Ramaswamy published Woke, Inc., a book that tears apart the concept of shareholder capitalism, claiming that it “makes rosy promises of a better, more diverse, environmentally-friendly world, but in reality this ideology championed by America’s business and political leaders robs us of our money, our voice, and our identity,” according to the best-selling book’s description.
Furthermore, ESG standardization has been complicated, making it challenging for stakeholders, with all their perceived power, to adequately measure the efforts of the companies they want to support. Europe, for instance, is far more advanced when it comes to ESG investment, accounting for close to 70 percent of global sustainable funds, according to various analyses.
Canada’s falling behind too according to a recent report by the Institute for Sustainable Finance, a network of academics and experts in areas of business and sustainable finance and run out of Queen’s University. Unlike the European Union, Canada has no specific regulations requiring information about the sustainability of investments.
Last November, a powerful group of Canadian pension plan investment managers overseeing eight funds totalling $1.6 trillion dollars in assets called for standardisation of ESGs.
“How companies identify and address issues such as diversity and inclusion, human capital and climate change can significantly contribute to value creation or erosion,” the group noted in a joint statement, pointing out that COVID-19 has laid bare inequities that businesses must address.
Can ESG Make a Measurable Difference in the World? Depends Who You Ask.
If you believe Tarek Fancy, sustainable investing and its environment, social, governance (ESG) hangers-on are a bust.
And why would anyone believe him? He’s seen it all from the inside.
Fancy, a Canadian entrepreneur and former banker, worked for a major investment management corporation called BlackRock Inc. where he was its first global Chief Investment Officer for Sustainable Investing. His job was to incorporate ESG considerations into the global investment work the firm undertook. He describes the burgeoning industry in a damning three-part essay he published last August called ‘The Secret Diary of the ‘Sustainable Investor’.”
His main conclusion: Citizens are wrong to expect businesses to “voluntarily lead the way on sustainability” even with lofty promises, calling sustainable investing a “deadly distraction” that prevents citizens from expecting their governments to protect the public good.
In fact, a 2020 survey that Fancy and Ryerson University commissioned asked 3,000 North Americans their views on the topic and found that Americans who saw positive business and financial headlines were 17% more likely to trust corporations over governments to address future sustainability. (Canadians, apparently, weren’t as easily distracted, given our higher trust levels in institutions.)
“Immediately after leaving BlackRock, I had reached the conclusion that our work in sustainable investing was like selling wheatgrass to a cancer patient. There’s no evidence that wheatgrass will do anything to stop the spread of cancer, but it’s tempting to believe it, especially when the doctor is advising chemotherapy,” wrote Fancy in a play-by-play breakdown of all that’s wrong in the industry.
“Unfortunately, I now realize that it’s worse than I originally thought: the evidence around the deadly distraction made it clear that we weren’t just selling the public a wheatgrass placebo as a solution to the onset of cancer. Worse, our lofty and misleading marketing messages were also delaying the patient from undergoing chemotherapy. And all the while, the cancer continues to spread.”
Capitalism By Any Other Name is Still Capitalism
“Stakeholder capitalism”, coined by academic R. Edward Freeman at the University of Virginia’s School of Business in the 1980s, broadened the definition of whose interests corporations are meant to serve from solely their shareholders to others who may be impacted by their practices. Yet, capitalism remains about the bottom line and unless there are systematic ways to measure compliance to shared values across sectors, as well as ways to keep corporations accountable or reward positive behaviour, then ESGs could amount to little more than an exercise akin to putting lipstick on a pig.
Just as the recently released Netflix movie “Don’t Look Up” bitingly demonstrates, relying on the most wealthy in society to voluntarily address the disasters facing humanity is a Hail Mary pass. While many industry leaders are paying lip service to ESGs, billionaires like Warren Buffett aren’t even trying. Earlier this year, he refused the idea of requiring ESG reports from his corporations’ subsidiaries, calling such expectations ‘asinine’. Other corporations refusing to get on board include Amazon Inc.
Furthermore, other critics point to the overly broad principles that ESG represents and the lack of sophistication of most investors in understanding exactly what a corporation means by its commitments to such principles.
“The most effective criticism is that the acronym ESG covers far too many bases for any meaningful fund investment allocation policy,” wrote David Stevenson, founder and strategic adviser at ETF Stream in an article last month.
“There is no internal coherence between these ideas and therefore it ends up turning into a giant exercise in ticking boxes and data fakery aka greenwashing.”
What is Greenwashing?
For those of us who still remember our pre-pandemic hotel stays, we likely recall those little cards in the bathrooms asking us to help save the climate by reusing our dirty towels.
It’s a practice that goes back decades and in the 1980s, an American environmentalist by the name of Jay Westerveld came up with the term to describe it as an example of marketing and public relations efforts by big business to appear to care for the environment with superficial gestures.
Without Accountability, What Gives?
Today, ensuring accountability in the ESG sector is crucial to ensure that what is actually pledged amounts to real change, pointed out Suzanne DiBianca, Chief Impact Officer at Salesforce, in an article last year for the Davos Agenda, a gathering of world leaders and businesspeople.
“For too long, impact has lacked accessible measurements for stakeholder value. Many voluntary frameworks exist, and although major certifying bodies are now coming together to harmonize metrics, no single, accepted global ESG standard for corporate disclosure is yet in place,” she argued.
“As such, investors, consumers, and prospective employees lack an effective way to compare and contrast corporate action and impact. An ESG reporting framework convergence will give all stakeholders visibility into the actual impact of a company.”
One can get lost in all the flowery, aspirational language that ESG-proponents advance. DiBianca talks about the necessary intersectionality of ESGs, joining them with the UN’s 17 Sustainable Development Goals (SDGs), including eradicating poverty and hunger. Who wouldn’t want to see corporations do their fair share when it comes to making the world a better place and rewarding them for their good corporate citizenship?
In fact, 4,000 signatories representing $120 trillion dollars have committed to the UN’s Principles for Responsible Investment. Problem is, as Fancy argued in his essay, “there’s no clear definition of what that means — and much of it is believed to be a surface-level, box-ticking compliance activity.”
George Floyd and Corporate Pledges Towards Supporting Racial Justice
Last August, the Washington Post analysed racial justice pledges by corporations to determine how much was acted upon following the murder of George Floyd (an example of addressing the social in ESG). The Post noted that the U.S.’s 50 largest companies and their foundations promised at least $49.5 billion to confront racial inequality.
“Looking deeper, more than 90 per cent of that amount — $45.2 billion — is allocated as loans or investments they could stand to profit from, more than half in the form of mortgages. Two banks — JPMorgan Chase and Bank of America — accounted for nearly all of those commitments,” reads the analysis by reporters Tracy Jan, Jena McGregor and Meghan Hoyer.
“Corporations are not set-up to wield their power for the greater good as much as we give them credit for, a lot of times,” Phillip Atiba Goff, a professor at Yale University who co-founded the Center for Policing Equity, told the reporters. “They are constrained by things they feel they need to do to manage their brand in a world where Black liberation does not have consensus.”
Another academic, Mehrsa Baradaran, a law professor at the University of California at Irvine whose research focuses on financial inclusion and the racial wealth gap, pointed out that even when corporations attempt to address social ills – they have their limits.
“The answer to these massive problems is not in capitalism doing better or more. It’s not going to come from philanthropy. It’s not going to come from promises. It’s got to be a policy change,” Baradaran said. “We don’t want just benevolent billionaires and nicer, softer, more-woke monopolies. We want an economic structure that allows for more mobility, and we don’t have that.”
Has the Backlash Against Sustainable Investing and ESGs Begun?
In an article this past December, Meagan Andrews, with the World Economic Forum, suggested that there’s a backlash underway against sustainable investment, even as the sector booms:
“…There has recently been a healthy dose of skepticism raised regarding sustainable investing. Regulators (such as the US Securities Exchange Commission, the UK’s Financial Conduct Authority and the European Commission) are paying close attention to green claims and the construction of sustainable financial products. There are also other critics claiming sustainable investing might be doing more harm than good. So where does this pushback leave the industry?”
Given that the World Economic Forum has created Stakeholder Capitalism Metrics, no surprise that Andrews argued that standardization will help make a difference in ensuring that measurement delivers information to show real world impacts of company commitments.
She noted the creation of the recently created International Sustainability Standards Board that aims to “deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.”
Critics and Supporters Have One Thing in Common: Government Matters
What’s clear from both supporters and critics alike: Change won’t happen without government participation.
“Government intervention is needed to really move the market. Critics have argued that sustainable investing is a dangerous distraction from effective climate change fixes such as a carbon tax, or a price on carbon. However, it’s not a zero-sum game. An industry movement, working in conjunction with bold government policy, will transform markets in a much more radical way than is currently the case,” concluded Andrews.
But as in the satirical film “Don’t Look Up”, government intervention will only matter if it’s truly based on hard data and progressive policies, rather than on an economic model that is failing everyone but those bent on profiting at all cost.
Requiring that hard data though may result in the creation of something altogether different.
“At some point, investors will realize that the emperor has no clothes and that ESG strategies are capturing the wrong outcomes and impacts,” concluded Stevenson at ETF Stream.
“At that point, ESG will probably go the same way as smart beta – last decade’s great fad. It will be replaced in turn – I hope – by a more careful and forensic series of micro strategies and measures designed to capture real impacts that matter to the end investor.”
. . . and to the world.
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