What is driving the hype, hoopla, and hysteria of environmental, social, governance (ESG)? In the 1970s at the height of disco mania, Time magazine memorably described the phenomenon as the “noun, verb, and adjective” of the decade. As corporate gurus look back on the present decade, there are likely to be many contenders for the noun, verb, and adjective label for our times. The pandemic certainly looms large and so would the current crypto mania. However, in terms of sheer hype, hoopla, and hysteria in the business world, the rise of environmental, social, governance (ESG) would be the top contender for the label.
In an era of social media memes, Twitter trolls, and fake news, ESG has proven to be bullet proof by rallying the most cynical corporate tycoon, millennial staff, and the NGO sector around the proposition that business can do well by doing good. Since the launch of the Sustainable Development Goals (SDGs) business interest in all things development, climate, and ESG has soared. But sustaining this interest over a longer period is already proving to be challenging. For business itself, their approach toward ESG is being defined by what Einstein once described as three of the “great forces” ruling the world – fear, greed, and stupidity. Fear, because businesses are feeling the pressure from investors and regulators and don’t want to be left behind in the ESG race; Greed, because ESG is also a massive business opportunity as the rise of sustainable finance demonstrates, with an estimated $3 trillion of assets under management and attendant concerns over greenwashing, which we will discuss later; Stupidity, because every corporate endeavour, however virtuous it might seem, will inevitably lead to excess.
There are the sceptics and the cynics of course, who dismiss the entire phenomenon as “woke capitalism” or worse a “scam”, as Elon Musk memorably described it after his electric car company Tesla was excluded from the S & P ESG Index, with oil major Exxon Mobil still in it. In short, business appears to have a love-hate relationship with ESG with plenty of lovers and plenty of haters. As a polarising topic, ESG just about mirrors the world we live in.
The business community in developed and developing countries does not speak with a unified voice when it comes to saving the planet from negative climate change and in pursuing good corporate behaviour. This is a community with sharply diverse voices and perspectives about how workers should be treated in the 21st century. the origins of the climate catastrophe, and its impact. In conversations with climate sceptics, many of whom reside in the corporate sector, I am often struck by their naivete and lack of interest in understanding climate change. Their dismissive talking point is often about today’s relatively benign weather, wherever it happens to be, as proof that global warming is either faked or hyped up. In emerging markets, business leaders also tend to underplay the two other pillars of ESG – social and governance, where the emphasis is on treating employees and customers fairly and ensuring that the company is governed by strong internal rules, processes, and Board oversight.
The challenge I have figured out is in the framing and the question must be asked early and urgently – is ESG a massive virtue-signalling operation where business is embracing the narrative to do good but tangible evidence of real progress is hard to come by? To answer this question, one must understand the power dynamics of business in America and Europe, which are radically different from those of emerging markets. Vast swathes of business in the developed world in America and even in Europe, a continent traditionally reliant on bank lending, is owned by shareholders, not of the mom-and-pop variety, but by a very small group of large institutional investors. This elite group comprises giant pension funds, asset managers, sovereign wealth funds, private equity funds, and family offices owned by billionaires.
In this small group, no one looms larger than Larry Fink and BlackRock. For the uninitiated, BlackRock is the world’s largest asset manager with a phenomenal $10 trillion in assets under management. Its investment reach extends far and wide into the developed and developing world. When Larry Fink, the all-powerful CEO of BlackRock picks up the phone and calls one of the CEOs of the vast companies in his portfolio, he is never placed on hold or asked to leave a message. The CEO on the other side of the line quivers, and I have witnessed this first-hand and am often anxious to reassure Fink that all is well on his patch and no nasty surprises await.
One of the more remarkable developments over the past decade has been Fink and BlackRock’s unconditional embrace of ESG as an organising principle. In late January each year and I exaggerate (only a little bit), the most eagerly awaited event for CEOs of BlackRock’s portfolio companies is the arrival of the “annual letter” from Fink, equivalent to the encyclical issued by the Pope on weighty spiritual and societal matters.
Fink’s warning about the risks of corporate inaction notwithstanding, there are prominent segments of business in America and Europe who are either misreading or ignoring his message altogether. Even in grey London, where the talk about today’s weather is the most popular icebreaker with strangers and acquaintances, there is a formidable group of City grandees, bankers, traders, and assorted asset management types who are either climate sceptics or outright climate deniers. I feel the same chill from climate deniers when I navigate the corridors of Washington DC, where they have thrived for decades – before, during, and well after the Trump era. Unlike City grandees, who are suspicious about the science behind climate change, their counterparts in DC are sceptics and deniers mainly for profit and wealth accumulation. I don’t seriously expect the oil industry lobbyist advocating for greater shale licenses to be a climate sceptic. However, just as the capital city he thrives in, the lobbyist can silence any serious discussion about climate change with whataboutery, obfuscation, and obstruction. A favoured talking point is that the “jury is still out” on global warming, that is, there are “many scientists” who are unconvinced about the speed of acceleration and the lobbying industry prospers by bringing unaccredited scientists to Capitol Hill to argue this case.
The broader point is that if major power centres like London and Washington DC are business epicentres of climate lobbying and denial, what possible hope is there for developing countries where politics is more febrile and subject to state capture by the business community? The answer will be through a combination of enlightened governments, citizenry, and the business community joining forces to deal with the most profound challenge of our lifetimes. The challenge is existential and there is bound to be serious opposition, as we are already witnessing, in making tangible progress in reducing the pace of increase in global temperatures and in compliance with ESG principles.
While Larry Fink and his firm’s climate and ESG advocacy are necessary, there are other vastly more powerful societal forces which have successfully been holding business to account for their misbehaviours and acts of omission. By the yardstick of sheer bravado and chutzpah, international NGO Greenpeace stands out as an activist group which is willing to go the extra mile to hold companies to account. There is also the growing power and influence of young staff in companies to contend with in shaping ESG policies and outcomes of their employers. In many ways, the challenge is also inter-generational as the older, climate-sceptic generation makes way for a more socially aware millennial class who feel the urgency and the impact in their daily lives. For this generation, ESG is a must-have for business, not an afterthought. Young people look up to climate activist Greta Thunberg as their role model rather than any ageing, fat-cat CEO.
To cut to the chase, young staff want to be associated with reputed organisations and any public indication to the contrary is likely to drive them away. No 20 or 30-something wants to be quizzed over drinks by hostile peers. While the average age of the typical CEO skews older, the average age of staff in most organisations tends to be in the thirties. However, a truly comprehensive ESG framework which is global in scope is pie-in-the-sky thinking, unrealistic and unattainable in the short term.
Excerpted with permission from The Notorious ESG: Business, Climate, and the Race to Save the Planet, Vasuki Shastry, Emerald Publishing Limited.