ESG: How this acronym became a force to be reckoned with

Reuters the news agency recently called it: “the hottest acronym in asset management.”

It was referring to the three letters ESG that once triggered a frown on many an executive forehead. Puzzled many asked: “what do these letters mean; why are they so important? ”

ESG indeed used to be territory that most investors, let alone business leaders, could safely ignore.

Until the last couple of years company concern about ESG could hardly claim much of a corporate profile As for being a focus for ethical leadership, well, forget it.

Now you can hardly avoid bumping into yet more news of ESG and its progress into the mainstream of corporate thinking. For example, various recent FT articles describe important aspects of ESG at work in companies. At least one of them demonstrated graphically how ESG “increasingly penetrates the investment mainstream.”

So what difference do these ESG factors mean for ethical leadership? The shortest answer is

“it makes the role even more complicated, as leaders try to absorb these three trends into daily decision making.”

For instance, the share of global assets operating on ESG principles seems likely to more than double from about 25% today to between 50-65% in the next five years. No CEO worthy of that role can therefore afford to ignore such a shift.

What it means to be an ethical leader will alter in numerous, and as yet still unpredictable ways. Take governance. Hardly a topic to excite the blood of most CEOs. Many would expect to delegate much of the follow-through to their highly paid legal and compliance teams.

Except such specialists are no better equipped than the CEO for making make sense of the ethics of say, artificial Intelligence, computer-based learning, or face recognition systems. All are currently forcing their way up the agenda of most big corporations.

Or consider social impact and sustainability. A leading French asset manager for example, recently committed to run its entire euro assets (1.5tn) along sustainable investment principles by the end of 2021. That represents a five-fold growth in asset restructuring. Any CEO attempting to buck this trend would be turning a deaf ear to the zeitgeist.

Nor is it just asset managers who are issuing a wake up call for CEO’s to absorb the ethics of ESG.

BP’s chairman Helge Lund recently went on record as backing a resolution by the lobby group Climate Action. The latter called for greater transparency from the company on how its strategy is consistent with the goals of the 2015 Paris Agreement on climate change.

In promoting a faster transition to a lower carbon energy system BP’s Chairman Helge Lund claimed this was

“…not to protect our licence to operate, or as some form of elaborate green washing. Apart from being the right thing to do, it is simply in our own best interests.”

Finding “the right thing to do” though, continues to be ever more challenging to the ethical aspirations of corporate leaders. Recently JPMorgan, for example, chose to cut its ties with opioid maker Purdue Pharma, the OxytContin maker. The company has been accused in thousands of lawsuits of fuelling the US opioid crisis.

In backing away from Purdue, JPMorgan was not merely taking a sensible risk-based decision. US banks have increasingly waded into varied ethical debates.

Citigroup and Bank of America for example, restricted financing to makers and sellers of firearms. JP Morgan pulled the plug on private prison financing earlier in 2019.

As the JP Morgan Purdue decision suggests, balancing the financial and social value of ESG poses significant ethical leadership challenges. It involves setting and monitoring social and financial goals. It also means structuring the organisation to pursue both, hiring employees who will enhance them and managing with both goals in mind.  Difficult trade-offs must be made that keep the business focused on both aims requiring the ability to mix creativity with discipline.

The shift to ESG values does not yet depend entirely on a clear ethical stance. Financial statistics are also bolstering the ethical choices. For example, ESG strategies now demonstrably outperform other forms of investment.

This success shows up particularly in emerging markets. For instance the MSCI Emerging Markets Leader Index, which includes 417 companies that score highly on ESG, regularly outstrips the normal emerging markets benchmark.

Consequently in 2017, one of Europe’s biggest insurers announced plans to benchmark its entire multi-billion dollar portfolio against ESG indices. As its chief investment officer put it:

“It is more than doing good–it makes economic sense.”
Guido Furer Swiss Re, chief investment officer
.

Pressure on companies to up their game on ethics goes far beyond just adopting ESG principles. Consumers too are playing their part.  Amplified by the megaphone of the internet, consumers have successfully pushed companies such as Coca Cola, Mercedes-Benz and Delta Airlines to pull their dollars from controversial TV programmes, unsavoury internet content, and use of face recognition technology. 

The Edelman’s Earned Brand survey shows that people are using their purchasing power to reward or punish companies based on whether or not they share shoppers’ values. According to a report in the FT, of 14,000 respondents in 14 countries, 30 per cent said they are buying or boycotting brands based on values more than they were three years ago.

Talking about ethics

The breadth of ESG leaves many business leaders confused about the immediate ethical implications. The short term solution is simple:

leaders confused about the immediate ethical implications. The short term solution is simple:

Keep talking about ethics to uncover meaning.

Across the world, most employees say that top management does makes an effort to talk about the imperative of ethics:

Source: Building companies where values and ethical conduct matters October 2018, ECI

Leaders’ failure to support those who do step up and complain makes this situation worse.  

Witness the saga at KPMG where two high level employees felt they had to resign over the failure of the company to act on their complaints over the behavior of a senior colleague.

For all the hype about ESG though, actual ethical behaviour in companies remains work in progress. Almost two thirds of workers for example, say they have experienced severe forms of unethical behaviour at work.

A Warwick Business School (WBS) survey reported that harassment was the most common forms of misbehavior, followed by sexism, theft and verbal abuse.

Where employees report misbehaviour most (77%) say there’s no change in the workplace as a result. Which poses perhaps the biggest leadership challenge of all: how to impel company culture towards more ethical behaviour.

Despite this somewhat negative reality, researcher Miranda Lewis who helped conduct the WBS study argues ethical organisations are now

“…increasingly seen as the norm, the benchmark to which all organisations should endeavor to aspire to.”

The once lauded “return to shareholders” now no longer holds sway for judging a company. Though it retains its power for a certain breed of investors–for the moment.

ESG is merely the latest iteration of what it means to be an ethical business leader. There is certainly more to come.

Sources

  • H. Lund, Why BP supports a fast transition to low carbon, Ft 20th May 2019
  • Building companies where values and ethical conduct matters, ECI October 2018
  • H.Kuchlet et al, Purdue grows more isolated as JP Morgan cuts ties with opioid maker, FT 23 May 2019
  • G.Tett, More chief executives are paying for their ethical missteps, FT 24 May 2019
  • ESG accelerates into the investment mainstream, 19th May 2019
  • S. Bond, Shoppers buy or boycott brands based on values, FT 19/6.17
  • J.Kynge, The Ethical Investment Boom, FT, Sept 2017

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