ESG – Where do we stand?

Whilst consumers are willing to pay more for sustainable and ethically made products and there is more investment cash than ever available for companies with ‘green’ credentials to tap into, the ESG label has become a controversial part of the business landscape.

The ESG Debate: Real Issues vs. Overblown Concerns

There are some real issues for directors to wrestle with and others that have been overblown. There are legitimate concerns about ESG as an organising concept. It’s arguably too imprecise and unfocused a concept, housing issues that are fundamentally different under one roof. Some may justifiably ask, what do greenhouse gas emissions (E), modern slavery (S) and audit (G) have in common?

ESG has also become increasingly politicised, particularly in the US, where the political right view social issues – such as racial justice and sexual orientation – as part of a progressive ‘liberal’ agenda that companies should not get involved in, labelling it ‘woke capitalism’.

Director Perspectives on ESG

A recent poll of 915 IoD members found that 42% of directors viewed the three components of ESG as of equal importance. However, of those who highlighted a specific component, the largest number (26%) stated that the most important was governance.

Commenting on the results, Dr. Roger Barker, Director of Policy and Governance at the Institute of Directors, said:

“Many business leaders see the value of incorporating ESG-type factors into their decision-making processes. However, the rapid proliferation of the ESG industry – in terms of things like ESG ratings and reporting standards – has also given rise to some scepticism and confusion.

“Some see the rise of ESG as facilitating ‘greenwashing’. Others may view it as a manifestation of a political agenda. However, the politicisation of ESG should be resisted, given the essential role that ESG-type factors can play in managing organisational risk and corporate reputation.

“Our members highlight a legitimate concern: by subsuming governance into the broader concept of ESG, the unique role of corporate governance in driving corporate success may be neglected. A solid governance framework is a pre-requisite for success in the other aspects of ESG. Getting governance right should be the starting point for the directors of all kinds of organisations.”

Embracing ESG: Challenges and Opportunities

ESG is here to stay. It will change and evolve, but it is an area of business that directors should embrace – understand the challenges and manage the risks. In that respect, it’s no different from a plethora of other challenges and opportunities that directors must take account of.

With this in mind, it’s important that businesses take note of what has happened in the US and try to avoid some of the political posturing that has contaminated the ESG debate. This should allow directors to get on with making clear-headed, governance-based decisions to secure the long-term success of the company.