Don’t Throw out ESG with the Greenwashing Bath Water

The ESG backlash is a symptom of an emerging new economic order, according to Kate Cacciatore, Head of Sustainability at FigBytes.

ESG sceptics, it’s time to trust the process! ESG has gone mainstream and generated a backlash because our collective definition of value creation is evolving. Making business truly sustainable – and evaluating how sustainable it really is – requires a mindset shift that isn’t going to happen overnight but is critical for our future.

The ESG debate has turned into an intellectual and political minefield. Polarised views are muddying the waters of understanding and clogging up the pipes of collective progress. The recent tide of stories about greenwashing and divergent ESG ratings by financial actors have called into question the whole enterprise.

A tale of two paradigms

ESG sits precariously in the middle of a great tug-of-war between two paradigms at a critical turning point in the collective human journey. The old paradigm sees things in terms of a zero-sum, competitive business landscape where ‘distractions’ like climate change must be ignored for the sake of profit. The new paradigm questions the assumption that “business exists to make a profit, period”, which took root during the Industrial Revolution, and concludes that it isn’t working for us anymore. No one wants their children to inherit an uninhabitable planet torn by social conflicts born from our scorched-earth, profit-driven approach.

The new paradigm is the expression of a new worldview – well-documented by social scientists Paul Ray and Sherry Andersen – based on a belief in the intrinsic worth of each human being, the importance of caring for the natural ecosystems that sustain us, and the interconnectedness of all living things. The new worldview “transcends and includes” the old one, as Ken Wilber puts it. It is not against profit, rather it wants profit to be the by-product of economic activity that is driven by a deeper purpose rooted in fundamental human values. Those who resist the new paradigm do so because – as Buckminster Fuller pointed out – they fear there isn’t enough value to go around, and they will lose out in a world that puts as much emphasis on community spirit and the common good as it does on individual freedoms.

Between these stark polarities there is a whole spectrum of colourful perspectives that can inform our inquiry about the significance of ESG in this collective drama. For just as individuals vary in their positions on the spectrum, so do organisations, whose culture emerges out of the mindset and thinking of the people who compose and lead them.

A new, expanded definition

So what does all of this mean in the real world? As Michael Porter, Sir Ronald Cohen and others have pointed out, a new economic order is emerging. Our collective perception of value is evolving beyond a sole focus on profit (return + risk) to align with the growing conviction that all economic actors must create life-enhancing, planet-sustaining value through their activities (+ impact). As Mark Carney has emphasised, it is all about building values back into our concept of value creation.

Companies increasingly understand that their licence to operate and competitiveness depend on their integration of sustainability into core business strategy. However, not all fully espouse the new paradigm or can build enough consensus around it within their board or organisation, and herein lies the key to understanding the phenomenon of greenwashing. Some companies and financial actors tinker around the edges of their strategy and dress up their investment offering in the clothes of the new paradigm without really changing the substance of their approach. At the other end of the spectrum, the companies that resonate with the new paradigm put the horse before the cart, becoming purpose-driven and transforming their culture, business model and strategy accordingly.

A creative process worth supporting

The point is that the different profiles, efforts and underlying intentions of economic actors in this new game of expanded value creation reflect where they are on the spectrum between the old and the new paradigms. When seen in the context of the cultural (r)evolution that the sustainability mindset represents, we can appreciate the contribution that ESG is making to an exploratory process that is reaching for something more and better. The process is complex and messy, as the impulse to evolve causes us to bump up against and break through the invisible walls of the economic system that is the legacy of the old paradigm. But like any birth process, it is also creative, beautiful and inspiring.

So, if we accept this premise, where does ESG go from here?

First, there is no silver bullet or one-size-fits-all methodology for ESG analysis, which is still grappling with all the complexity and messiness. And clearly, some investment products seek to avoid the worst negative externalities and risks to financial performance in the name of enterprise value, while others are intentionally designed with a ‘double materiality’ mindset to seek out the companies that are bringing about the most positive impact on people and planet. Then there is everything in between. The question is, as an investor or indeed a customer or an employee, what is your intention? What kind of value are you seeking?

Second, while acknowledging this diversity of perspectives and intentions, to evolve successfully we need to strengthen and harmonise global regulatory frameworks and standards, creating a level playing field and the transparency necessary for capital to flow to the most sustainable profitable companies, notably those bringing solutions to the urgent challenges we face and helping redesign the economic system for a new era.

The aim here is to sharpen the focus on the most significant positive and negative impacts and their benefits and costs to society. By telling the story of their expanded purpose and strategy through the handful of (doubly) material issues, targets, KPIs and data that are most relevant to their sector and meaningful to them, companies can put a point on the arrow of their sustainable business performance. Standardising this kind of approach will reduce the burden on companies of the proliferation of investor and customer questionnaires, which add an unnecessary compliance cost to the mix.

Pressure to align

ESG and sustainability aren’t annoying distractions from business as usual. They contribute (imperfectly) to a better future. Ultimately, each player in the game must decide what matters to them and what role they intend to play, but as the new paradigm of shared sustainable value becomes more dominant and balance sheets embrace the social and environmental ‘externalities’ that have long been left out in the cold, economic actors are likely to feel increasing pressure – or desire – to align. In the words of Buckminster Fuller, “on personal integrity hangs humanity’s fate”.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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