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The case to SEE beyond ESG
ESG and sustainability are hot topics in business and, increasingly, civil society. Hardly a day goes by without one or both being mentioned in newsfeeds and across social and mainstream media. Since the term ESG was first coined in 2005, and more so through the coronavirus pandemic, researchers and commentators have promoted ESG as the answer to what have been held up as great issues of our time—issues such as changing climatic conditions; the impacts of fossil fuels; population growth; modern slavery; the excesses of capitalism; geopolitics; and, more besides.
Shareholders are starting to acknowledge companies should be doing a better job, in terms of appropriately stewarding the resources used in the operation of their business and fulfilling their duties. Institutional investors in particular are applying direct pressure to refocus board attention and business priorities to tackle the great issues—their underlying belief is that ESG-based approaches provide more sustainable long-term value creation.
What is one to make of these developments?
Evidence to support claims that ESG-based investments outperform other investments is yet to emerge. The question of why this might be the case remains open. It could be that investments have been poorly placed; expectations are unreasonable; measurement systems are inappropriate; and, probably, more besides. Of these possibilities, the spectre of inappropriate measurement systems looms large.
A couple of years ago, Ethical Boardroom, a magazine read by tens of thousands of board directors, advisors and executives, commissioned an article on the matter. I concluded that a measurement and reporting framework founded on the three main capitals used in business would probably provide a more informative and complete measure of sustainable business performance than ESG. A copy of that article follows. If you have any comments and suggestions on this, including criticisms, please do let me know—either in the comment box below or, if you prefer, a private message.
In our book we draw on research arguing that with transparency (and similar methodologies) corporate isomorphism is evident where attention is diminished to acknowledging only what can be measured, where what is measurable becomes important, prioritised and managed. The risk in focusing on what can be measured and, therefore, shared is that what is measured becomes the objective that is paid attention and strived for. For a corporation it also becomes attractive only to aim at or express what can be measured. Accountability through these tools is demonstrated when they are made operational—subordinate to a calculable, steerable, and controllable process. Measures are turned into targets - a device that sets ideal levels of attainment - thereby involving processes of abstraction and de-contextualisation that merely conceal the real workings of the organisation. From this perspective these methods can mask the complexity of organisational reality and reduce it to a few simple indicators, thereby meeting external expectations for accountability and ethical performance while neglecting or ignoring issues that may be more difficult to share, measure, evaluate or disclose. That is not to say that use of such tools should be rejected in relation to practicing good corporate governance