Is it good business to do good?
At a session on ESG at HBI 2023 (‘Building a robust ESG framework’) all panellists appeared to be on board with the idea that adopting serious ESG strategies is not only good for society and the planet, it’s also ultimately good for the business itself and its shareholders. Companies need to shift from thinking of it as a burdensome cost to thinking of it as a necessary investment. Is this true?
One panellist even cited evidence that there is a positive correlation between things like employee satisfaction, gender diversity in the management team and use of renewable energy and a business’ financial performance, suggesting that one causes the other.
Whilst it may be true that there are certain cases where business or financial objectives align with ESG objectives (for example, improving operational or energy efficiency is good for both emissions and the bottom line), we cannot assume it will be true across the board. If companies are serious about the – rather daunting – task of becoming fully sustainable, they must acknowledge the very significant costs and trade-offs that doing so will involve.
Our panellists did not deny that there are costs involved. But they were all of the view that it was both a necessary investment and one that will ultimately pay off – not just for society and the planet, but for the business itself. One fact that was pointed to was that we are moving towards a situation in which all companies will be measured and assessed on ESG criteria.
Whilst it may be true that we’re heading towards a situation where all companies will have things like their emissions profiles (and perhaps also their levels of gender diversity) continuously and rigorously assessed, this by itself can only be part of the solution. How exactly more rigorous reporting or ESG rating will lead to those that are doing better on such metrics performing better financially is another – as yet unanswered – question.
One panellist did say that “ESG will do to finance what X-ray did for medicine,” suggesting that companies that don’t take ESG seriously will find it increasingly tricky to get finance. The thinking appears to be that, as the ESG ratings provided by ESG rating agencies become more rigorous and well-regulated (and therefore consistent with one another), investors and lenders will all start to use those ratings to determine how risky investing or lending to them is (just as is done with credit ratings).
But there is a flaw in this assumption. Unlike with credit ratings, there is no direct financial risk of investing in a business that doesn’t take ESG seriously. The risk depends on customers, investors or other partners punishing the companies. And even if all major investors and banks in the western world decide to stop investing and lending to companies which don’t take ESG seriously, there will always be other sources of finance on the global market. This is why initiatives which have tried to use the financial sector to stop new coal power plants being built haven’t worked.
A better solution might be to have regulators enforce things like emissions reductions. Or, at the very least, implement carbon taxes that are high enough to seriously incentivise it.
We would welcome your thoughts on this story. Email your views to Martin De Benito Gellner or call 0207 183 3779.
