Recently, I’ve been getting a lot of questions about ESG. Most people are starting to hear about this idea that has actually been going on for quite some time. This is the perfect opportunity to explain and give examples of what it is because of current events.
ESG stands for Environmental, Social, and Governance. It is similar to CSR (Corporate Social Responsibility), which has been around for ages and most are familiar with the acronym. If you go to most corporate websites, there usually is a tab about some social responsibility or some sort of “good” they are doing. While this isn’t necessarily a bad thing, ESG takes it one step further.
Like a house loan, your credit score matters. The credit score determines whether or not you have the record to be able to pay back the loan without problems. Corporations are also subject to loans with a proven track record of paying back, but since ESG has come into play, your fiscal track record is not all they’ll be looking at. If your company doesn’t meet the requirements of ESG, you can be denied certain benefits.
Environmental issues measure things such as carbon footprints or green sustainability. The social part of ESG measures how well you get along with the community, employees, and other companies that you work with. Governance includes how much people are being paid (including management), internal control, or rights and responsibility. Common examples of what can lower an ESG score would be the emission scandals of auto manufacturers or the misuse of data from tech companies.
Now, you may be saying this is a good thing because these companies that make enormous profits are in turn helping the community. First, who makes the criteria? Like the difference between biology and psychology, one is based on hard facts while the other is based on statistics and behavior that may never be consistent. The same with a credit score vs ESG. While ESG may have factors that seem favorable, it is favorable to the people who created the system as opposed to the hard facts and numbers. We are seeing this in the education system as well, especially in the form of CRT. Instead of teaching only the facts, the curriculum is getting into theories and feelings as well. The people who are making these criteria are putting placeholders on what they THINK is important and not what actually IS important. What is important is for a company to thrive on capitalism and not have to worry about whether they will get a loan that depends on what some people think versus their actual financial record. Even when left to their own devices, large corporations thrive on their high self-governance, especially in a time such as this where someone can easily quit their job and start a new one because of working conditions. The information on companies is so easily accessible that it would be easy to destroy a company that cannot hold itself accountable.
Take a deep dive into the social aspect. I’m a minority woman and I am appalled that we still have affirmative action. In my experience, it is never about race or gender when it comes to hiring a good workforce. It is competence no matter what you look like. Affirmative action goes hand in hand with the Social part of ESG. Not only does this put pressure on companies to hire based on race, gender, or sexual orientation, but it’s unethical to blackmail companies into who they hire. The government should have no business telling you who you can hire for your OWN company and you shouldn’t be penalized by banks to hire who you see fit. If your workforce is made up of almost all minorities and women because they are the most competent and qualified, then there’s also no problem with that.
As for current events, we are seeing this now in Russia. Companies are pulling out of Russia and hurting their economy in retaliation for the invasion of Ukraine. First of all, the “Russia” that’s invading is actually the top officials, while the citizens can’t do anything about the invasion. Those who speak out against it are penalized. Russian citizens are penalized even further by having all of the American companies pull out of Russia. Yes, this weakens the Russian economy but it also hurts the people of Russia, but the companies aren’t just citing the invasion. Many are pulling out because of their ESG scores. They will sacrifice their profit to “do the right thing”. But it is really the right thing or are they just trying to save themselves from retaliation among those who rank their companies?
This is happening with cancel culture as well. One has a right to cancel their Disney subscription because they disagree with their ideologies, but will Disney suffer for their ideologies from ESG? Most likely not because the people who design the tiers and criteria for Disney would most likely agree with them. Will Hobby Lobby be penalized because they aren’t open on Sundays because of their Christian beliefs? Will Spotify be penalized because they refused to cancel Joe Rogan?
ESG has no place in our corporate world. Environmental, social, and corporate behavior should be left at the discretion of those corporations and should not be held hostage.