If ESG’s a Loser…What Can We Do About it?

I recently wrote about the reasons the Wall Street Journal’s opinion piece titled “The Many Reasons ESG Is a Loser” had a point.

Among other things, the article summed up a similar article by the Harvard Business Review stating, “1) ESG funds have underperformed; 2) companies that tout their ESG credentials have worse compliance records for labor and environmental rules; 3) ESG scores of companies that signed the U.N. Principles of Investment didn’t improve after they signed, and financial returns were lower for those that signed…4) Companies publicly embrace ESG as a cover for poor business performance.”


If you haven’t read the first part of this two-part series, read HERE.

There are definitely choppy waters to navigate in the greenwashing and ethicswashing world (to use a term coined by my fabulous Spark Compliance co-worker Ellen Hunt).

But now that we know the bad news, how can we protect our company from prosecutorial scrutiny, or the bad PR associated with unsupported disclosures? Here are five ways.

Inform About Risk

Many CEOs and managers know the right thing to say, but far too many are not putting their money where their mouth is.

In NAVEX Global’s recent survey of 1,100 compliance officers, of those involved in ESG, 56% said the CEO supported the program.

Meanwhile, only 31% had dedicated an ESG resource, and only 23% had a dedicated budget. Whew!

What can be done about this?

First, if you handle ESG, talk to your board and leadership teams about the interest regulators have shown in false or misleading disclosures. Your executive team may be unaware that touting ESG cred where it doesn’t exist can be legally, financially, and reputationally damaging.

Commit to Serious, Measurable Accountability

Terms like “best efforts,” “striving to,” and “always considering the impact of our actions” are hollow.

To ensure that ESG efforts are real, metrics must be developed, followed up on, and published – at least internally to key stakeholders.

The best practice is to publish those results and to be accountable for them.

Get a Charter and Write Down Roles

Accountability lies with the company itself, but people must be made accountable by specifying who is to do what.

There is a famous adage that the fastest way to starve a cat is to have everyone in charge of feeding it. To avoid the ESG equivalent of the starving cat problem, draft a program charter.

Make sure that the charter does the following:

  • Lays out the structure of the program
  • Designates leaders for the E, S, and G pieces, if one person isn’t in charge of all of them
  • Describes how metrics are obtained, reviewed, and adopted
  • Creates a working group where needed
  • Outlines how oversight will work
  • Creates a cadence for board reporting

Beware the Unintended Consequences of Incentives

One of the more distressing elements of the Harvard Business Review article is the paradox of creating ESG goals that may disincentivize good behavior.

The Review speculates:

Why are ESG funds doing so badly? Part of the explanation may simply be that an express focus on ESG is redundant: in competitive labor markets and product markets, corporate managers trying to maximize long-term shareholder value should of their own accord pay attention to employee, customer, community and environmental interest. On this basis, setting ESG targets may actually distort decision making.

Some companies, like Mastercard, have linked ESG goals to employee compensation. Employees will all celebrate or suffer based on whether ESG-related goals are met.

The focus is admirable, but execution must be considered.

Incentives and accountability drive behavior, but before you institute goals relating to ESG, consider how people might manipulate their numbers and how likely they would be to do so.

As we learned from the Wells Fargo case a few years ago, misaligned incentives can create big problems.

Prepare for the Coming Tide of Disclosure Obligations

There are two reasons to get the company’s ESG house in order.

First is the coming disclosure legislation.

The European Commission is marching toward requiring disclosures for larger companies. The SEC is in the process of drafting disclosure rules as well (although a recent Supreme Court ruling may create constitutionality questions regarding those rules).

The EU and SEC draft legislation will likely apply only apply to larger and/or publicly traded companies. However, those larger companies will, in turn, need to know the environmental impact of their supply chain.

So even if your company is not caught by the legislation, you may have to reveal your carbon footprint to fulfill requests by your customer base. It’s best to prepare now.

ESG is not going away any time soon, even if it currently is a loser (from a financial services fee and performance perspective).

True commitment comes from talking the talk and walking the walk.

The “walk” in this case means (1) a budget, (2) commitment from senior management and the board, (3) human resources to complete the activities, and (4) meaningful disclosures that enable investors, customers, and employees to see progress.

With good programs in place, ESG can go from a loser to a big winner – with you in the winner’s seat.

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Kristy Grant-Hart

Kristy Grant-Hart is the founder and CEO of Spark Compliance.
She's a renowned expert at transforming compliance departments into in-demand business assets.