The Good, the Bad & the Ugly: Three Future Visions for ESG


degrowth | double materiality | esg | esg investing | growth | ifrs | overconsumption

Barely an infant, ESG is under attack. That can inspire unity, create fractions or end up a mirage.

Environmental, Social and Governance (ESG) is in its infancy. Barely anyone talked about ESG before the Business Roundtable and then the World Economic Forum declared that we are leaving a single-minded focus on shareholder value behind and entering an era of stakeholder capitalism where the purpose of corporations shifts from profits only to what used to be described as the triple bottom-line: people, planet and profits. This was in 2019, before the pandemic. Serving all stakeholders, the environment being a special one, has – by now – become central to businesses of all size.

Stakeholder capitalism really is a hybrid experiment. Can we keep capitalism with its growth and consumption paradigms going while serving the interests of various stakeholders and saving the planet from total destruction? Can capitalism operate sustainably? The framework ESG offers is a means to that end. Far from perfect, ESG provides a compass for organizations wanting to (a) identify and manage long term operational risks and opportunities and (b) improve their leadership and performance benefiting people and the environment. Because ESG performance can be measurable, it can be managed even if a universal set of standards is yet to emerge.  At the same time, the lack of such standards and regulations make it difficult to compare apples with apples and produces lots of bad apples greenwashed to look like ESG champions. That hurts the infant. Do the trillions of dollars going into ESG funds truly serve the global transition to sustainability? It will be hard to tell until we come up with universally accepted definitions, metrics and reporting obligations based on those measurements. Where can ESG go from here?

  1. The Good

Given the mandate of IFRS to design the metrics that will define non-financial performance, we may hope that within a couple of years ESG will be standardized making ESG performance comparable in a transparent manner. This pivotal work may underpin the movement of capital towards sustainably run businesses and do away with much of the greenwashing that is around today. The market consensus is that ESG investing will grow and grow fast. Through transforming the banking sector and investment funds, integrating ESG in investment processes, it is years rather than decades before financing for bad actors, ESG laggards and harmful business practices will dry up because of the risk to reputation, potential lawsuits and new regulatory requirements. That is a good thing. ESG matters because it has serious consequences measurable in dollars. If the standardization process works properly, businesses can’t avoid truly transforming the way they operate. ESG will be core to future business DNA. It’ll be company genetics rather than the cosmetics used to be called CSR. That genetics should be based on a vision of double materiality: the impact of social issues and climate change on the business AND the impact of the business on its human and natural environment. Anything less would be a betrayal of the real purpose of ESG.

  1. The Bad

If we take too long to agree on those metrics, the reputation of ESG and indeed the whole notion may be undermined. There are calls for breaking ESG up into separate ‘fields’ of responsibility.  It’s hard to cherry pick ESG priorities, but an “enough and fast enough” response to the climate emergency seems like an obvious first choice. If future generations can’t breathe and live, what purpose do we serve by focusing on anything else? The G7 and governments around the world agreed to prioritize mandatory climate reporting. Indeed, the relevant directive of the EU Taxonomy has just come into force. By prioritizing and regulating climate protection, the ‘E’ seems to take on a life of its own, leaving the ‘S’ in the ‘TBD’ space.  Governance, many argue, has traditionally been better defined and regulated at least for public companies through financial markets and their actors. It’d be a pity to let ESG fall to pieces and fragment into less significant units leading to a lack of focus on issues that are interconnected.

  1. The Ugly

Worse, ESG may never realize its potential. A recent article and podcast by Bloomberg titled ‘The ESG Mirage’ generated much debate about whether ESG creates system value or simply enterprise value. It accused ESG ratings mechanisms being biased towards financial materiality rather than considering the reduction of harmful impacts on society and the environment. The podcast stated that capitalism always finds a way to repackage an idea into a product that benefits the system. Critics say that ESG, as currently evaluated by ratings firms, may be used and abused as an instrument for delaying urgent action. That’s why it’d be instrumental to move rapidly on metrics and regulations and expand on financial materiality to double materiality while reducing emissions without delay.

It sounds simple, but there is a jungle of interests involved and even as we act, questions remain about just how deep we must dig to uproot current business practices. Will degrowth and over-consumption induce a paradigm change in boardrooms and redefine winning business models to win-win strategies for people and planet? These are hard questions to crack for even top strategy consultants. Reimagining your business in a world of uncertainties might need someone with specific ESG expertise. We got that covered for you.