Article published in the Philadelphia Business Journals October 10, 2022.
The term “ESG” appears in the business and financial press with increasing frequency. This acronym stands for “Environmental, Social and Governance,” and describes the approach that managements and boards take to ensure the long-term sustainability of their companies. There has been significant pushback against ESG from segments of the financial community and the political right.
The elements of ESG are described in an Aug. 30 article published by the Corporate Finance Institute, as follows:
Environmental
Environmental criteria refer to an organization’s environmental impact(s) and risk management practices. These include direct and indirect greenhouse gas emissions, stewardship over natural resources, and the firm’s overall resiliency against physical climate risks (like climate change, flooding, and fires).
Social
The social pillar refers to an organization’s relationships with its stakeholders. Examples of factors that a firm may be measured against include Human Capital Management metrics (like fair wages and employee engagement metrics) but also an organization’s impact on the communities in which it operates and on supply chain partners, particularly those in developing economies where environmental and labor standards may be less robust.
Governance
Governance refers to how a company is led and managed. ESG analysts will seek to better understand how leadership’s incentives are aligned to stakeholder expectations, how shareholder rights are viewed, and what types of internal controls exist to promote transparency and accountability by leadership.
BlackRock, the world’s largest asset manager, was recently criticized by Republican elected officials for embracing ESG, especially its environmental principles. Arizona attorney General Mark Brnovich has stated, “It’s sad that some groups are more interested in pushing a far-left agenda than protecting Americans from skyrocketing energy costs.” Another criticism claims BlackRock is violating the firm’s fiduciary responsibilities by not strictly focusing on financial returns.
In a letter to BlackRock CEO Lawrence Fink dated Aug. 4, 19 states’ attorney generals wrote in part, “BlackRock’s past public commitments indicate that it has used citizens’ assets to pressure companies to comply with international agreements such as the Paris Agreement that force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States.”
On Sept. 7 BlackRock responded, “We believe investors and companies that take a forward-looking position with respect to climate risk and its implications for the energy transition will generate better long-term financial outcomes,”
BlackRock’s response is consistent with the Sept. 9 report of the Commodity Futures Trading Commission, which states,’ “Climate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”
How did ESG come to the forefront? In August 2019, the Business Roundtable issued an updated statement on the purpose of the corporation signed by 181 CEOs of major corporations, broadening the primary objective of maximizing shareholder returns. The Business Roundtable stated, “companies should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.”
Not everyone agreed with the Business Roundtable statement. The Council of Institutional Investors said, “The statement undercuts notions of managerial accountability to shareholders.” The Wall Street Journal stated, “It’s … notable that the CEOs for America’s biggest companies feel the need to distance themselves from their owners.”
Both the CII and WSJ should have said being a good corporate citizen is a necessary condition for maximizing shareholder return.
Quoting The New York Times, “[The Business Roundtable’s updated statement] was an explicit rebuke of the notion that the role of the corporation is to maximize profits at all costs.”
I agree with ESG principles. As leaders, we need to treat our customers, employees, suppliers and communities in the right way and operate our companies in an ethical manner. This is how to ensure sustainability and maximize shareholder returns over the long term.
Stan Silverman is founder and CEO of Silverman Leadership and author of “Be Different! The Key to Business and Career Success.” He is also a speaker, advisor and widely read nationally syndicated columnist on leadership. He can be reached at Stan@SilvermanLeadership.com.
