This is the third of three blogs focused on ESG (Environment, Social & Governance). Our first article reported some of the catastrophic environmental events reported in 2022. The second described the most significant meetings and agreements made by key decision-makers to slow global warming. This third blog is intended to help leaders evaluate their ESG strategies, plans, practices and policies for 2023 and beyond.
The Three Dimensions of Efficient ESG Decision Making: An Assessment Model for 2023
For any corporation, ESG considerations entail evaluating a complex intersection of financial, regulatory, and political concerns. We recommend leaders review their ESG agenda across three dimensions:
- The decision-making horizon
- The degree organizational outcomes are affected by regulation
- The degree organizational outcomes are affected by consumer behavior
The decision-making horizon is most significant as it applies to financial performance. Implementing an ESG agenda requires investment in terms of time, resources and capital. A growing chorus of critics claim ESG violates a company’s fiduciary responsibility to investors. On the other hand, some evidence supports the premise that embracing ESG boosts business performance. If a global recession begins this year, business profitability in many sectors is likely to become more difficult, which will make investments in ESG more vulnerable to criticism.
The degree organizational outcomes are affected by regulation roughly aligns with the weight that ESG consideration should have in investments, planning and operations. Regulations will continually pressure organizations to strengthen their ESG agendas. Why? Because politicians will face corresponding pressures from their voting publics, who will demand more aggressive steps to save the environment and improve equity in many areas (health, wealth, education, etc.) as the global population continues to grow, most likely by billions.
In recent years, we have seen ESG reporting requirements become more expansive and rigorous. Many asset management firms are building ESG into their lending criteria. Governments at all levels are incorporating select ESG criteria as they select business partners. More and more pressure is being placed on companies to diversify workforces from entry level up to the board of directors.
The degree organizational outcomes are affected by consumer behavior is most important to consumer-facing companies because the public is increasingly prone to base purchasing decisions on a company’s ESG performance. With social media, company practices that appear harmful to the planet or unfair to people can attract global attention and trigger a response in minutes. This can lead to lost sales, boycotts and protests. It can quickly erode brand value that took decades to create.
When brands and corporate reputations fall out of favor, they become more vulnerable to lawsuits, regulation and shareholder challenges. Big Pharma is facing regulatory headwinds because of drug prices only the wealthy can afford or the distribution of addictive drugs like fentanyl, regardless of the harm to society. Fossil fuel companies are under ESG pressure by a growing number of larger investors, with some colleges and state pension funds divesting themselves of any financial interest in them. Social media companies face rising criticism regarding their protection and ownership of user data. Lawsuits and proposals for further regulation are increasingly common.
19 state attorneys general sent a letter to investment giant Blackrock calling for an SEC investigation, claiming the company’s ESG practices were counter to its clients’ fiduciary interests. In parallel move, West Virginia Treasurer Riley Moore banned five major financial institutions — including Goldman Sachs, JPMorgan and BlackRock, which have limited their involvement with the fossil fuel industry — from entering into any banking contract with state agencies.
It is evident there are two sides to every ESG consideration — risk and reward, gains and losses, criticism from either the left or right.
It is evident there are two sides to every ESG consideration — risk and reward, gains and losses, criticism from either the left or right. Considering ESG decisions against the backdrop of potential financial repercussions, the regulatory landscape, and consumer behavior will create efficiencies for leaders as they communicate their ESG approach to stakeholders.
We hope our three blogs prove useful to those intent on taking a fresh look at the ESG agenda in 2023. Read part 1 and part 2 for more context on the events that led us here.