arge corporations and small businesses—not just governments and individuals—play a role in shaping a country’s outcomes related to governance, poverty eradication, and sustainable development—the key themes for this year’s International Monetary Fund/World Bank Group spring meetings.
This role can be often gauged from the ESG compliance they undertake. And how do we know that? Through their ESG disclosures. However, not all companies have similar levels of transparency and systems in place for disclosures. Many such companies have struggled to get their ESG disclosures in place in the absence of a uniform definition of ESG.
The ESG-themed regulations and investment ideologies, though embroiled in political controversies, are fast shaping the corporate narrative related to these key themes. These regulations rest on compliance with three broad norms of Environmental, Social and Governance. But the execution of the concept in real business life is largely playing out on an “each to its own” basis. This is because; ESG regulations, in most countries, are often not uniform and are disclosure-driven.Companies are supposed to disclose what they are doing, in formats laid down by regulatory bodies. Since the ESG concept is still nascent, regulators are also moving slowly toward making detailed disclosures mandatory for all businesses and have prioritized seeking it from large corporations.
However, what these large corporations say and do about giving back to society is typically met with skepticism due to concerns related to “greenwashing” and lip service. Talking about the latest in governance and sustainability is different from undertaking effective actions to foster it. And companies are still establishing structures to measure inputs for disclosures such as emissions, gender pay gap, and supply chain as being ESG-compliant.
This is also the case with assessment of the impact of the ESG work. There is hardly any penalty yet on non-disclosure although wrong or misleading disclosure has attracted penal provisions in some cases. In April 2022, the US Securities and Exchange Commission charged Vale SA, one of the world’s largest iron ore producers, with making false and misleading claims about the safety of its dams through its ESG disclosures.
Incidentally, most companies have taken up ESG issues that are easy to execute and make for good optics, relegating more serious and relevant issues to long-term planning. For instance, for a mining company, it is convenient to talk about planting a million trees instead of choosing to not mine in environmentally sensitive areas or in the proximity of forests. Similarly, for consumer goods companies, it is easier to roll out hiring targets for women on the shop floor instead of hiring women as CEOs or as directors on the boards. For a company selling snacks and processed foods, it is easier to talk about spreading awareness among parents to reduce the stress on their kids, but the company won’t look at making fundamental changes in its product portfolio to make it healthier for the kids. It is simpler for companies to consider hiring transgender or differently abled individuals in their workforce rather than making products and services that are generally more inclusive.
Since ESG compliance is still relatively new, companies seek to capitalize on low-hanging fruit. Their stakeholders, such as employees, customers, bankers, and regulators as well, seem to be considerate with what companies are disclosing as their actual achievement as against the targets to be achieved. Most companies end up undertaking convenient ESG compliance rather than changing the outcomes on the ground.
Interestingly this convenient ESG compliance is proving enough to help companies improve their rankings in the ESG indices, which in turn are used as a benchmark by ESG-conscious funds to invest in companies. In effect, a small and easy change brought about by a company is helping it win over the funds. There remains little incentive for companies to aim for the more difficult-to-achieve goals. Besides, there is no uniformly recognised mechanism to verify whether what has been disclosed to be done has indeed been done and whether what has been done is indeed what was required to be done. This reinforces the criticism meted out against ESG investing as being ambiguous in terms of its measurement and impact.
There needs to be a uniform understanding of what ESG stands for and what it doesn’t. There is a need for a disclosure structure to be put in place that doesn’t simply emphasize disclosure but also implementation in both letter and spirit.
a global affairs media network
Convenient ESG is Not Good ESG
April 15, 2023
Corporations have a key role in shaping national outcomes in governance, poverty eradication, and sustainable development. But the newness and opacity of ESG compliance means we often don't know how well or poorly they are acting, writes Kiran Somvanshi.
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arge corporations and small businesses—not just governments and individuals—play a role in shaping a country’s outcomes related to governance, poverty eradication, and sustainable development—the key themes for this year’s International Monetary Fund/World Bank Group spring meetings.
This role can be often gauged from the ESG compliance they undertake. And how do we know that? Through their ESG disclosures. However, not all companies have similar levels of transparency and systems in place for disclosures. Many such companies have struggled to get their ESG disclosures in place in the absence of a uniform definition of ESG.
The ESG-themed regulations and investment ideologies, though embroiled in political controversies, are fast shaping the corporate narrative related to these key themes. These regulations rest on compliance with three broad norms of Environmental, Social and Governance. But the execution of the concept in real business life is largely playing out on an “each to its own” basis. This is because; ESG regulations, in most countries, are often not uniform and are disclosure-driven.Companies are supposed to disclose what they are doing, in formats laid down by regulatory bodies. Since the ESG concept is still nascent, regulators are also moving slowly toward making detailed disclosures mandatory for all businesses and have prioritized seeking it from large corporations.
However, what these large corporations say and do about giving back to society is typically met with skepticism due to concerns related to “greenwashing” and lip service. Talking about the latest in governance and sustainability is different from undertaking effective actions to foster it. And companies are still establishing structures to measure inputs for disclosures such as emissions, gender pay gap, and supply chain as being ESG-compliant.
This is also the case with assessment of the impact of the ESG work. There is hardly any penalty yet on non-disclosure although wrong or misleading disclosure has attracted penal provisions in some cases. In April 2022, the US Securities and Exchange Commission charged Vale SA, one of the world’s largest iron ore producers, with making false and misleading claims about the safety of its dams through its ESG disclosures.
Incidentally, most companies have taken up ESG issues that are easy to execute and make for good optics, relegating more serious and relevant issues to long-term planning. For instance, for a mining company, it is convenient to talk about planting a million trees instead of choosing to not mine in environmentally sensitive areas or in the proximity of forests. Similarly, for consumer goods companies, it is easier to roll out hiring targets for women on the shop floor instead of hiring women as CEOs or as directors on the boards. For a company selling snacks and processed foods, it is easier to talk about spreading awareness among parents to reduce the stress on their kids, but the company won’t look at making fundamental changes in its product portfolio to make it healthier for the kids. It is simpler for companies to consider hiring transgender or differently abled individuals in their workforce rather than making products and services that are generally more inclusive.
Since ESG compliance is still relatively new, companies seek to capitalize on low-hanging fruit. Their stakeholders, such as employees, customers, bankers, and regulators as well, seem to be considerate with what companies are disclosing as their actual achievement as against the targets to be achieved. Most companies end up undertaking convenient ESG compliance rather than changing the outcomes on the ground.
Interestingly this convenient ESG compliance is proving enough to help companies improve their rankings in the ESG indices, which in turn are used as a benchmark by ESG-conscious funds to invest in companies. In effect, a small and easy change brought about by a company is helping it win over the funds. There remains little incentive for companies to aim for the more difficult-to-achieve goals. Besides, there is no uniformly recognised mechanism to verify whether what has been disclosed to be done has indeed been done and whether what has been done is indeed what was required to be done. This reinforces the criticism meted out against ESG investing as being ambiguous in terms of its measurement and impact.
There needs to be a uniform understanding of what ESG stands for and what it doesn’t. There is a need for a disclosure structure to be put in place that doesn’t simply emphasize disclosure but also implementation in both letter and spirit.
