Doing well by doing good is a business idea that’s been kicking around for a while, but since BlackRock CEO Larry Fink fired off his letter heard round the corporate world in early 2018, the topic of ESG has become omnipresent in our lives.
As we enter proxy season 2019, directors are being inundated from investors and proxy advisors telling them that they have to get it right. Left unanswered: Get what right? And how? The result is one of the all-time great snipe hunts in American business.
Is GE having some 600 “ombudspersons” around the world for “early detection of potential compliance issues,” an ESG effort? Sure, sounds like it. Too bad it didn’t help GE investors this year. How about employee wellness? Is that ESG? Influential firms like KKR say it is, with a full page on their “ESG and Citizenship” site devoted to showcasing programs to help their employees track their “biometric health scores” and “address risk factors” for heart disease, cancer and the like. What about Starbucks shutting down all of its stores for diversity training? Or Nike’s Colin Kaepernick ads? Is that ESG?
The only honest answer right now is maybe.
A veritable ESG-industrial complex has sprung up to help you figure it out. The sheer scale of the consulting industry associated with ESG is a testament to its complexity and confusion.
Its here to stay. In an era where zero-fee index investing rules the roost, curated funds with a do-gooder flavor and a few basis points of fees represent opportunity for financial firms. In October, Fink’s $4 trillion BlackRock launched three new “sustainable core ETFs” while predicting global ESG ETF assets will rise to $400 billion by 2028. “I do believe that the demand for ESG is going to transform all investing,” Fink said at the at The New York Times Dealbook conference in November.
The nonprofit Sustainability Accounting Standards Board recently made some headway in making ESG more doable for directors, thankfully. They issued 77 industry-specific standards “designed to assist companies in disclosing financially material, decision-useful sustainability information to investors.” SASB isn’t the only organization that’s vying for you to use their reporting standard (although I’d say that rhyming with FASB certainly gives them a leg-up on marketing). Still, it is a welcome start.
What we really need here, though, is a rule of thumb. We humans crave simple ways of framing the complex—so we can actually move forward. In that vein, here’s a great shorthand way of thinking about ESG that I heard the other day: Non-balance-sheet liabilities that will become balance-sheet liabilities.
Yes, it’s over-broad, and no, it does not have a cool acronym or 12-page blue-ribbon study associated with it. But it does—critically—put ESG squarely in the category of risk management rather than marketing.
It also highlights another important point: As a board, you should be defining what ESG means for your company, not waiting around for outsiders to define it for you. Done right, this is supposed to be about actually improving business, not just checking boxes and creating paperwork.
When it comes to ESG, there are no hard and fast rules right now. Whatever your company, whatever your industry, in this wild-west environment, smart boards will lead the way on defining ESG for themselves, rather than wait to have it defined for them. Chances are they’ll run their businesses better as a result.