Robert Sheen is founder and CEO of Trusaic, a purpose-driven technology company focused on pay equity, DEI and healthcare.
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The debate over ESG (environmental, social and governance issues) has simmered for years due to the growing pressure on business leaders and the investment community to address it in meaningful ways.
This pressure is being applied not just by regulators but by stakeholders of virtually every type—investors, customers, business partners, employees and job seekers. All of them want greater transparency into the operations and business practices of the companies they invest in, buy from, partner with and work for. A 2022 KPMG survey of more than 1,300 global CEOs, for example, found that 69% now face higher levels of stakeholder pressure to improve their companies’ ESG reporting transparency.
Under this kind of pressure, the ESG debate was bound to reach a boil at some point. Arguably, that point has arrived.
ESG has become highly politicized and even framed by some as part of a “woke agenda.” The debate around ESG is frequently unhinged from a simple fact: ESG-related risks are now among the greatest and most urgent threats businesses face.
DEI, fair and equal compensation, ethical supply chain practices, carbon emissions, workplace safety and all of the other issues encompassed by ESG directly affect the performance and profitability of our organizations, especially over the long term. They also significantly affect our ability to attract investors, raise capital, hire new talent, retain our most valued employees and nurture public trust in our brands.
In short, taking action on ESG is an essential component of judicious business management.
Distraction Or Strategic Imperative?
ESG has been attacked as a “distraction” from what businesses are supposed to do—make as much money as possible. However, as a 2022 EY Global Corporate Reporting and Institutional Investor Survey found, 78% of investors think companies should make investments that address relevant ESG issues even if it reduces their profits in the short term. And as a 2022 McKinsey report observed, openly addressing and managing ESG issues and risks are “preconditions for sustaining long-term value.”
Indeed, ESG can hardly be considered a distraction with regulations expanding, evolving and creating prime areas of legal risk and potential grounds for class action lawsuits. Business leaders who treat ESG as a mere distraction are putting their organizations in jeopardy, and those who say ESG regulations are unnecessary (because responsible business leaders already pay attention to their organization’s social and environmental impacts) are ignoring the obvious: Marquee companies such as Google, Goldman Sachs and Amazon, among others, have recently behaved in ways that demonstrate why ESG oversight is so important.
From its inception, ESG was intended to help business leaders widen their view of their organization’s financial and competitive sustainability. ESG helps create this comprehensive picture by embracing an organization’s impacts on society, on public health and safety, and on the quality of life for people inside and outside of its walls. As many studies have shown, these impacts profoundly influence the attitudes and actions of consumers, investors and current and prospective employees—the very foundation for success and how well-positioned an organization is to sustain and grow its success.
Some of ESG’s critics conflate ESG investing with businesses investing in ESG, two entirely different things. ESG investing is the process of making investment decisions based on the combination of financial factors along with environmental, social and governance factors. Businesses investing in ESG, on the other hand, refers more broadly to organizations devoting attention and resources to ESG-related issues that are relevant to them and their future success.
Certain types of businesses and industries (heavy polluters, for example) want to conflate these two matters because they believe it’s in their best interest to do so. It serves their immediate purpose to paint everything ESG in the broadest, most negative terms. Beyond being disingenuous, this is shortsighted and not in anyone’s best interest, not even their own, given the growing support for ESG among investors, consumers and other stakeholders. In fact, it’s an exercise in futility.
ESG Is Here, And It’s Here To Stay
There’s plenty of healthy debate still to take place. We need to come to an agreement on many things—which types of ESG initiatives are financially material; which data should we be disclosing and to whom; which metrics should be utilized in lawmaking, rating and reporting efforts; and so much more. But we can’t do any of this if we can’t depoliticize ESG and accept the fact that we must responsibly manage the ways we impact society and our planet.
These are big concepts and big challenges. To make progress on them, we need to take small, focused steps on specific ESG issues that are strongly tied to our organization’s purpose, mission and culture. This means each organization’s ESG choices will be unique, with a few notable exceptions.
For example, pay equity and transparency (which fall under the S in ESG) affect all of us. In the U.S., where a growing number of states are adopting pay transparency legislation, nearly 70% of workers would switch employers for greater pay transparency even if their pay remained the same. In Europe, the European Union recently approved a new pay transparency directive for its member states aimed at closing the gender pay gap; the directive includes measures related to pay transparency, pay data reporting, and enforcement and penalty mechanisms and will require every major employer to comprehensively review its pay equity policies. And in countries such as Norway, Switzerland, Germany and Canada, important transparency trends are also gaining a foothold. Like the issue of ESG itself, pay equity and transparency are clearly here to stay.
Taking action on ESG and the crucial issues it embodies, such as pay, demonstrates our respect for stakeholders, our communities and society at large. Attacking or staying silent on these issues doesn’t serve anyone.
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