increase in conversations around global warming, some executives and CEOs are likely reevaluating their company’s impacts on the themes commonly referred to as ESG.
ESG refers to a company’s practices in environmental, social, and governance areas, reflecting its ethical and sustainable commitments. The practice of many companies is to label these three essentials as sustainability– suggesting a tilt toward green initiatives.
However, this seemingly innocuous step can be profoundly consequential, potentially overshadowing the significance of human welfare and moral governance. This is cause for alarm.
True sustainability goes beyond a sole emphasis; it’s a three-pronged approach where each facet is equally vital to uphold the integrity of the entire framework.
According to a recent McKinsey Sustainability Report, the rising importance of ESG strategies is evident in the investment world. While the rate of overall private equity investments has been decreasing, “Investments into funds focused on sustainability rose from $5 billion in 2018 to more than $50 billion in 2020—and then to nearly $70 billion in 2021.”
Ideally, this uptick and corresponding commitment to positive ESG outcomes would ensure companies are equally robust in each of the three areas.
This, however, is often not the case.
A major part of ESG growth has been driven by the environmental component and responses to climate change, and for good reason. According to the Carbon Majors Report since 1988, only 100 companies are responsible for over 70% of global emissions.
There is no doubt that environmentalism must be prioritized. It is of the utmost urgency. However, if these same companies are not addressing workplace discrimination, consumer safety or unethical leadership, there is potential for a major gap in their responsibility matrix which can directly affect not only their bottom lines, but people’s livelihoods and safety.
The social impact arm of sustainability includes a company’s human relationships. It determines crucial aspects of their operations, from the treatment and safety of workers, its commitment to equity and inclusion, as well as its external impact which includes consumer and data safety and community engagement.
Why is this key to sustainability?
If organizations and companies are not prioritizing the physical, mental, and financial safety of humans, who will do the work to sustain the environmental goals within our corporations? How can we feasibly save the planet at the disregard of the very people who live on it?
Human flourishing is key to a company’s profitability. According to researchers from University of Toronto and Boston University, “An ESG focus can help management reduce capital costs and improve the firm’s valuation.”
The governance arm of ESG is equally imperative as it shines a light on how decisions are made, managed and compensated. It focuses on ensuring integrity, accountability, and shared progress in every step a company takes as it seeks to make and sustain profits.
The recent collapse of Silicon Valley Bank serves as a reminder of the effects of deprioritizing a focus on good governance. The failure of SVB was a direct outcome of a failed ESG strategy, according to testimony by the Federal Reserve Board’s Vice Chair for Supervision on Bank Oversight.
Choosing to neglect strong governance focus in exchange for a focus on profits has cataclysmic results.
Sustainability is a collective journey, rooted not only in the care of the planet but also in social responsibility and sound governance. Strong leaders and thriving people will create better solutions for our planet. As executives navigate the path of ESG, they must understand that the E, S and G are not mere letters in an acronym, but the very heart of the change the world hopes to see globally. By championing all three, the world inches closer to a future that is not just sustainable, but also safe, inclusive, and just for everyone.
