Delivering Genuine ESG

First, there has been a growing backlash driven by concerns that, by deviating from market forces, ESG directives will push up prices during a cost-of-living crisis. Pushback has also come on the grounds of undue ‘wokeness,’ and from stories of greenwashing and of fund managers not using rigorous analysis when promoting green/socially responsible investments.

Secondly, sincere ESG efforts are being undermined by confusion about the real value and aims of ESG. Investors and those executives responsible for ESG delivery in both private and public sector organizations are being misled by a series of false and damaging myths.

In a recent IEDP webinar Walid Hejazi, Professor of Economic Analysis and Policy at the Rotman School of Management, Andrea Barrack, Senior Vice President, Corporate Citizenship & ESG at RBC Royal Bank of Canada, and Susan McGeachie, Head, Bank of Montreal Climate Institute at BMO Financial Group, considered the forces hindering ESG adoption and offered useful insights to counter four false myths surrounding ESG:

Myth 1. ESG is all about climate and sustainability

Troubled by headlines of wildfires, air pollution and floods, and having recently emerged from the COVID pandemic, it is hardly surprising that many think of ESG as being about climate change and that the ‘S’ stands for sustainability rather than for social good.

The social aspect is key, particularly where it must balance environmental aims. It is for example iniquitous to call for immediate divestment in fossil fuels—'Just Stop Oil’ as the protesters shout—rather than for a managed transition that will require at least 20 years of fossil fuel production. In a world of mounting income inequality, it is the poor, especially those in the ‘Global South,’ who will suffer from a mismanaged transition—divestment and climate action that puts saving the planet ahead of saving humans alive today is morally dubious and socially damaging.

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Join Prof Walid Hejazi and colleagues on the new ‘Rotman ESG Designation’ program and learn how to build ESG considerations into sound business strategies

Dates: Sept 2023 – April 2024  |  Format: Hybrid  |  Location: Toronto

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The social side of ESG goes beyond those initiatives originally adopted in the early days of CSR, which largely entailed charitable giving. Rather the ‘S’ is about organizations treating their employees and other stakeholders equitably, and deploying the assets they have (products, services, etc.) to facilitate social change for the good—change towards gender and racial equity, indigenous rights, universal education, poverty alleviation, etc.

Myth 2. ESG is handled by a department in corporate functions

In the early days of CSR, a small social responsibility department typically sat somewhere beside the marketing department, few others were involved. Today as ESG has become a prime corporate driver and all decisions and actions are to be seen through an ESG lens, there is a need to spread responsibility across the organization. ESG cannot be delivered if left to be handled by a siloed lone department.

However, there is still a need for a central corporate function to provide leadership and to set strategies and targets. While making it happen must come from across the organization, with the work to be done delivered from each business unit and commercial business. The central leadership role is to convene, convince and bring people together, and to create a change of mindset—typically starting with the C-suite.

Myth 3. ESG is about the impact a business has on society and the environment

For many years there was a focus on the impact an organization had on society and the environment and limiting the damage it might be doing. From this came The Global Reporting Initiative (GRI)—an international standards agency that helps organizations understand and communicate their impact on issues such as climate change, human rights, and corruption—capturing those things material to investors.

Today the emphasis has expanded. ESG is not merely defensive and reactive or just focused on investor interests; rather its aim for the organization is to make positive active contributions towards solving environmental and societal problems that come within the broad sphere of its activities. As well as the direct good that this approach can bring it can also help persuade young people and those sceptical about its value to retain faith in market capitalism. Commitment to ESG goals can also help organizations attract and retain talent.

The key to delivering genuine ESG is for organizations to see their efforts also benefitting the business ‘bottom line.’ This introduces the concept of ‘double materiality,’ whereby organizations achieve both a positive ESG impact and a positive financial impact. Or to turn it around, double materiality suggests a business or an investment fund should not only care about how environmental, social justice and governance issues affect its bottom line, but must also be attuned to how their operations affect the world.

Myth 4. ESG is a form of ‘woke’ capitalism

ESG has been wrongly associated with radical eco-activism, instant divestment in fossil fuels, identity politics and more. None of these echoes of wokeness have anything to do with real ESG, which is a cause that is routed in market capitalism and is based on the premise that businesses as opposed to political parties or governments are best placed to effect genuine environmental and social change for the good.

The ‘G’ aspect is important in depoliticizing ESG. Beyond looking out for corruption and malfeasance, governance is about how organizations manage the eco-systems they inhabit—the public, customers, employees, suppliers, investors, governments, and regulators—to collaborate in achieving ESG goals. Effective corporate governance takes account of racial equity, income inequality, and other allegedly woke concerns, while delivering profits and sustainable growth for shareholders.

In normal circumstances ESG does not deny Adam Smith’s free market assertion: “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” But when big externalities, such as climate change, bring abnormal circumstances, it has to be right that markets are regulated—although as far as possible this should be done globally to avoid unfair market distortions. Far from being ‘woke,’ ESG is for effective, equitable capitalism that cares for society and the planet while facilitating the “invisible hand to promote an end which was no part of his intention.”

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You can view a video of the webinar this article is based on here.

Professor Walid Hejazi teaches on Rotman School of Management’s MBA, EMBA and custom executive programs including the new ESG Designation program. Andrea Barrack, who is also Executive-in-Residence at Rotman and Susan McGeachie also contribute to these programs.