Are ESG targets meaningless?

In this opinion piece, Faris Dean, Corporate Solicitor at 360 Law Group explores what needs to change in the understanding and use of ESG (Environmental, Social and Governance) targets.

It is very easy to be cynical about the new term ‘Sustainability and ESG’ and dismiss it as management jargon. However, neither are new concepts and they go back hundreds, if not thousands, of years.

ESG has been illustrated in many names, such as Corporate Social Responsibility, Good Corporate Citizenship, Responsible Citizenship or simply being a ‘good person’. They collate into the good human values that people, communities and society crave.

The main point is that it does not matter what they are called, but we need something to identify them so we can focus on practicing them, communicating them to organisations across different countries, and holding organisations to account.

Unfortunately, there has been a constant diet of sound bites and meaningless slogans and terms, under the notion of “creativity and innovation” whether in politics, media and business. This has resulted in many suffering from creative fatigue where we fail to ask the important question of: “How does your creativity or innovation genuinely help and benefit society and the environment?”.

In physics, Einstein’s First Law of Thermodynamics says: “Energy cannot be created nor destroyed, it can only be changed from one form to another”. The same applies to ‘Value’ and ‘Power’, while ‘Money’ is only a means of transferring both from one form to another. When thinking in these terms, sustainability and ESG start to make sense.

As we in the UK debate whether or not employees should work from home, Sweden and other Scandinavian countries didn’t have to; they had already empowered their employees and communities with the choice many years ago. Reason then dictated that hybrid working and good wellbeing should take priority over money and this would help the economy, and in turn society.

It is also worth keeping in mind that in many Far Eastern countries, looking after society and the environment is part of their culture. In the UK, the idea of looking after your employees, your community and the environment was practiced by the original Cadbury family in Bournville.

In the early 1990s, the UK Government asked the Cadbury family to come up with a code for good business practice. The final report ‘The Financial Aspects Of Corporate Governance’ (usually known as the Cadbury Report) was published in December 1992 and contained a number of recommendations to raise standards in corporate governance. The report’s recommendations have been used to varying degrees to establish other codes such as those of the OECD, the European Union, the United States, the World Bank, etc.

Why should the way we use ESGs change?

In today’s businesses, ESG has an important role to play. According the Gartner, 91% of banks monitor ESG, along with 24 global credit rating agencies, 71% of fixed income investors and over 90% of insurers. Investors also consider ESG investments safer and more stable bets with 85% of investors having considered ESG factors in their investments in 2020.

With many investors and major stakeholders now underpinning decisions based on ESG principles and assurances, the issue is that sustainability is all too often an ambiguous or subjective term based on self-reporting. There needs to be a way to standardise the measurement, so that one organisation can be compared fairly to another. It is a problem that has perplexed stakeholders and regulators for decades.

There are several ESG measuring tools on the market which have been developed by private and not-for-profit organisations. The issue with these is that they rely on only one perspective, either the organisation which developed the measuring tool or that of the organisation being assessed.

Another issue is that the logic behind such measuring tools is not clear, nor easy to understand by the public. In addition, the measuring tools are often limited to one dimension, so it is a score starting from zero which then increases as an organisation ticks certain boxes.

One solution is to turn the problem on its head. Rather than rely on organisations to measure and judge their own performance, the aim should be to use an impartial framework that assesses an organisation based on the views and experiences of key stakeholders, such as employees, suppliers, and customers.

This means all measurements need to be easily understood by any member of the public, since they are the most effective guardians of the environment and society, and it needs to show good and bad performance for effective comparison.

If we can achieve this type of standardised measurement, it will enable one organisation to be compared fairly to another. It will allow organisations of all types and sizes, from private businesses, universities to councils, to identify their ESG performance relative to other businesses of the same or different size and against those from different industries.

And most importantly, it can help to identify areas of concern so managers can shape their long-term strategy and implementation of ESG compliant practices for the future.