Recent pushback on ESG is a sign that it is evolving, with stakeholders taking steps to make ESG efforts more consistently tangible, meaningful and measurable. Calling out misinformed approaches helps make the case for proper design and action. Many business leaders are using the critique of ESG programs to analyze their current approach and rethink their strategies to create more value and impact.
Effective leaders take the following seven actions to evolve ESG sophistication:
By taking concerns seriously, leaders create the next level of maturity for ESG. If they ignore them, they reduce the credibility and effectiveness of ESG efforts. For example, some critiques find flaws in data collection and analysis methodologies for the environmental and social factors of ESG. And, while the most successful ESG funds may outperform the market, others lag, which could create issues in a down economy. Additionally, ESG reporting and compliance requirements can add significant cost and resource burdens to organizations.
Business leaders risk falling into a binary trap where anything associated with ESG is good (halo bias) or anything associated with ESG is bad (reverse halo bias). Some leaders believe they need to address every aspect of ESG, as opposed to those that are most relevant to their business. For example, GHG emissions may be a factor for a plastics company, but pollution from its products (including those from downstream customers) may be significantly more important as a priority. For an oil and gas company, carbon reduction and risk transfer strategies may be most relevant but could get lost in a long list of other factors if its ESG strategy and rationale are not clear. For a financial services organization, the ESG focus may be on where assets are invested and capital deployed. Effective leaders know there is not a uniform approach to ESG for all companies or situations.
Much has been written about “greenwashing” where an organization spends more time and money portraying itself as environmentally friendly than actually minimizing its environmental impact. Increasingly, experts also focus on “greenwishing,” which environmental economist Duncan Austin describes as “the earnest hope that well-intended efforts to make the world more sustainable are much closer to achieving the necessary change than they really are.” To enhance impact, effective leaders understand and are realistic about what is achievable through ESG, as well as costs and benefits associated with short- and long-term ESG activities.
By recognizing that certain investors, consumers and employees will be less enthusiastic about supporting ESG economically during recessions, bear markets and inflationary periods, leaders can maintain a more consistent approach to ESG. The Edelman 2022 Trust Barometer reported that these stakeholders continue to prefer values-based investments, brands, and employers even during economically challenging times. Effective leaders do well by never taking stakeholder interest for granted and making a data-driven business case that is aligned with the current environment.
Effective organizations use data and analytics to drive ESG and sustainability efforts. For example, climate, DEI, health, wellbeing and savings analytics help leaders predict and measure the impact of decisions, as well as identify and address specific risks and opportunities. A recent analysis of S&P 500 companies found growing interest in linking executive incentive awards to ESG measures. Many companies also are adding ESG incentive metrics, tied to business performance, deeper into their management and employee ranks.
Leaders can accentuate the value of ESG by addressing both risk and value creation opportunities as they prioritize and make decisions. This type of measured – and measurable – response follows the lead from investors and major private equity and venture capital entities, incorporating material ESG factors into decision making. It also helps apply best practices leading to improved performance, including tangible opportunities where ESG can create value, as well as where it mitigates risk (or both). This helps address concerns about ESG’s relevance.
To counter concerns over the disadvantages of short-term ESG thinking, effective leaders link ESG goals to managing long-term performance and risks. For example, they take steps to understand and quantify the environmental impact of their actions while also reflecting the multi-dimensional and multi-temporal aspects of climate risks in strategies. They build cultures where all employees can flourish. They implement strategies that consider governance more broadly than merely to avoid failure, fraud or scandal. Actions include defining appropriate decision frameworks and processes for boards and senior management, as well as enterprise-level measurement, analytics and protocols.
Current critiques about ESG represent a real opportunity for leaders. By taking concerns seriously, leaders can create enhancements and make ESG programs stronger, more credible and more effective in meeting intended goals.
A version of this article originally appeared on Forbes.com on June 16, 2022.
Discover how to navigate the pandemic and manage people-related challenges