ESG has surged in popularity over the last two years, at least in relative terms. I have been active in ESG research for 15+ years and I never would have thought the field would grow to what it is today. Even so, I can’t help but think the rapid and significant development in ESG research and practice has missed one critical mark.
As previously discussed, ESG is a universe of information which explores a company’s environmental, social, and governance performance in relation to it’s (typically longer-term) financial performance. It is a type of focused information regarding nearly all things above and beyond what has traditionally been considered by accountants and financial analysts. Knowing a company’s profits and operating expenses is helpful, but so is knowing its exposure and contribution to climate risks, access to resources, how it treats its employees, how decisions are made, and so on. Traditional accounting can be thought of as the data framework of shareholder capitalism whereas ESG can be thought of as the framework of stakeholder capitalism (even though we do take issue with certain elements of Stakeholder Capitalism itself).
The Business & Society relationship is now one which is understood in ESG terms.
What's Missing
When I started in ESG, it was a discussion among large-scale and long-term-oriented institutional investors. It was data of great significance but of narrow interest. It would not be a slight to early researchers and practitioners to say that ESG existed at the margins of finance. Fast-forward to today and ESG is (relatively) everywhere. Retail investors have access to seemingly endless ETFs and mutual funds claiming ESG exposure in some way. Yahoo and Google Finance include elements of ESG data front and center in their search results. University endowments are tripping over themselves to divest of holdings counter to particular ESG positions. As final proof of social validation, the terms and vocabulary of ESG are taking-over the longer-running discussions of corporate sustainability, impact investing, and social responsibility on all social media platforms. The Business & Society relationship is now one which is understood in ESG terms.
For every one decision made by an investor there are 100X more decisions being made by consumers...each and every day.
Even with all this development and excitement in ESG though, something is still missing. ESG is still developed and discussed as an issue of interest to investors...and seemingly only to investors. Yet this misses the mark. ESG may be of interest to investors, but it is of material consequence to consumers. ESG provides insight into how a company relates and performs to a landscape of stakeholder interests, concerns, risks, and opportunities--and of all company stakeholders, none are as important as consumers.
For every one decision made by an investor there are 100X more decisions being made by consumers...each and every day. The risks and opportunities a company faces, and hence the risks and opportunities an investor may be concerned with, run through consumers first. To continue to develop the ESG field for investors yet with a blind spot for consumers risks undermining the applicability of the field itself.
Fixing What Needs Fixing
The stereotype runs that investors make decisions based on data and consumers make decisions based on emotion. It would seem the ESG industry is developing with this stereotype in mind. The time has come to retire the old and tired marketing personas of the 1990s. There is a new consumer in the market. Mindless consumption is fading. People want to be intentional in the impacts of their shopping. Consumers want credible information, not simply pretty pictures and fairytales.
ESG is important to investors...and it will be even more important to them once it has been made applicable and accessible to consumers
For ESG to evolve to the next generation of development, for it to truly develop into a lasting and foundational element of decision-making and to have the impact which many of us know it can, it must broaden its perspective and applicability. ESG is important to investors...and it will be even more important to them once it has been made applicable and accessible to consumers. The Business & Society relationship, and hence ESG, runs through consumers first.
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