Closing the Gap -- What Makes “Good ESG” for Corporations?

To the extent the Business Roundtable is a reflection of corporate America, these changes are good news. However, they also bring into focus the question of what exactly constitutes “good ESG” for corporations, and a large number of market participants, regulators, and governments seem to be engaged in answering that question at the moment.

Finding a coherent set of answers is very difficult, and these conversations can quickly become uncomfortable as well; yet the ever-growing swell of ESG-related investments, public commitments, regulations, and policies suggests that sustainability is widely embraced as a good idea. So, why the disconnect?

Certainly, we still lack a consistent language for ESG, but that’s far from being the entire answer. Instead, it’s a deeper question of actions and behaviors. Even a brief perusal of sustainability reports issued by corporate America illustrates a tendency towards ideological contortions, corporate-speak wordplay, and a lack of clarity between what is substantive and what is performative. There is genuine positive action being taken, but it too frequently feels selective. Worst of all, we also see a repeated tendency to claim “ESG goodness” as a pre-existing intrinsic quality of a specific business, which fundamentally points to a defensive and anxious posture instead of genuine engagement.

We should understand the sources of this anxiety. First, ESG is vast and therefore intimidating. Environmental, social, and governance deliberately cover a range of problems that largely sit outside the traditional corporate field of vision. Embracing the concept of ESG pushes corporations towards developing a new identity for themselves, and one for which there is no definitive MBA textbook. In conceptual terms, ESG therefore demands a degree of public vulnerability that is anathema to how companies generally run themselves.  ESG can thus come across as both inescapable and demanding vulnerability. Threatening, in other words.

Secondly, there is an uncomfortable ideological question at the heart of ESG.   In its ambitions, ESG asks that corporations examine the unwanted, undisclosed, and unmanaged negative consequences of their actions on the world around them, and that the same corporations permanently change their behavior to “fix” these consequences for good.  By extension, certain stakeholders cannot systematically be expected to bear the burden of favoring another set of stakeholders.  For instance, is ESG at odds with prioritizing shareholder returns?  Is this even maybe “anti-capitalist”?  The answer to both questions is no: ESG voices the fact that while shareholder capitalism has done a lot of good, it has also failed to predict or rectify many of the problems that affect us today, from the financial crisis to deepening inequality, to climate change.  This is an existential and daunting change after decades of precedent, and in some cases this change may even require different speakers to address a new audience.

Finally, while we are still in the very early stages of truly defining ESG, the conversation is already changing fast. ‘E’ topics are becoming well understood but can also lull people into a belief that ESG is largely about embracing a compliance and reporting mindset. Meanwhile ‘S’ topics, and their ‘G’ articulation, are equally large and growing in urgency but still undefined in terms of clear action. One need only look at the global empathy and moral outrage which have infused this year’s conversations around racial justice and the pandemic.  

These will require a much more personal and challenging response: we are already at a point where philanthropy and diversity commitments are increasingly criticized as insufficient, and the ask is instead for a permanent response that goes to the core of how business is run, and how it is being re-engineered to actively reverse social issues. In this sense, the ‘S’ in ESG stands for “systemic” and aspires to be just as life-changing as the ‘E’.

Focusing on the language and taxonomies of ESG is necessary, but not nearly enough; indeed, it puts us at risk of missing this much larger, and ultimately more important, conversation.

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